Korean Won Falls Most Since 1998 on Credit Woes; Bonds Advance

By Kim Kyoungwha and Judy Chen

Sept. 16 (Bloomberg) -- South Korea's won fell the most since August 1998 as global investors accelerated sales of Asian equities in the wake of Lehman Brothers Holdings Inc.'s bankruptcy filing.

Korea's policy makers held an emergency meeting to discuss intervention in financial markets and government bonds rallied on speculation the central bank will cut interest rates. The won fell 19.6 percent this year, the worst among the 10 most-active Asian currencies outside Japan, as foreign investors sold more Korean shares than they bought every day except six since Aug. 1, according to Korea Exchange data.

``There's panic selling for the won as investors' sentiment is badly bruised by Lehman's bankruptcy,'' said Lee Myung Hoon, a currency dealer with Industrial Bank of Korea in Seoul. ``A global share tumble is taking a toll on the local equity market. We are not sure how far the won will drop.''

The won fell 4.4 percent to 1,160 against the dollar as of the 3 p.m. close in Seoul, according to Seoul Money Brokerage Services Ltd. That was the weakest level since 2004.

South Korea may provide additional money to help stabilize financial markets, Vice Finance Minister Kim Dong Soo said today. The nation's Kospi stock index tumbled as much as 7.1 percent.

``There's a concern in the short term that global stocks, bonds and currency markets will be more volatile,'' Kim said before the emergency meeting today with counterparts from the central bank and the financial regulator in Seoul. ``We will try to manage liquidity in a stable manner through measures such as open market operations.''

Remarks this morning by Choi Jong Ku, director general of the finance ministry's international bureau, that the currency's declines are ``excessive'' did little in curbing the won's loss.

``Excessive Reaction''

``Our foreign-exchange market reaction to the U.S. financial markets instability is excessive,'' Choi said in a statement in Gwacheon. ``An excessive reaction can cause a drastic adjustment.''

Goldman Sachs Group Inc. lowered its forecast for the won's level in three months to 1,130 from an earlier estimate of 1,040, citing ``large refinancing needs of Korean banks.''

The won will then climb to 1,110 and 1,090 over six and 12- month horizons, Economist Kwon Goohoon wrote in a report today.

``We continue to believe that the recent spike to around 1,150 is an overshoot,'' Kwon said. ``That said, we expect the won to remain under pressure in the short term. Korean banks will likely be net buyers of the dollar due to large foreign-exchange debts falling due within a year.''

External borrowings that mature in a year almost tripled to $175.65 billion as of June 30, official figures show.

Bonds Advance

Local currency bonds rose on speculation deepening instability in financial markets will persuade the central bank to cut interest rates.

``There's a flurry of bids for flight to quality,'' said Kong Dong Rak, a fixed-income strategist with Hana Daetoo Securities Co. in Seoul. ``The central bank, though not immediately, could lower interest rates in coming months.''

The yield on the 5.5 percent benchmark bond due June 2011 fell 14 basis points to 5.51 percent, according to the Korea Exchange. The price rose 0.38, or 38 won per 10,000 won face amount, to 101.44. A basis point is 0.01 percentage point.

The finance ministry sold 1.12 trillion won ($971 million) of 10-year government debt today at a yield of 5.73 percent.

To contact the reporters on this story:
Kim Kyoungwha in Beijing at
kkim19@bloomberg.net;
Judy Chen in Shanghai at xchen45@bloomberg.net