Korean Won Gains on Intervention Support; Bonds Little Changed

By Kim Kyoungwha and Judy Chen

Sept. 5 (Bloomberg) -- South Korea's won, Asia's worst performer this year, rose from near the lowest in four years on speculation the central bank intervened to slow its declines.

Currency reserves fell by $21 billion in the five months through August to $243 billion as the authorities bought won to curb inflation, Bank of Korea data showed. Speculation that South Korea may be heading for a repeat of the 1997 currency crisis that led the nation to the brink of an insolvency is ``groundless,'' Deputy Finance Minister Shin Je Yoon said today.

``Behind the won's strength today was large-scale intervention that seems to be billions of dollars,'' said Oh Suk Tae, an economist with Citigroup Inc. in Seoul. ``It's not a very desirable way of quashing the talk of crisis.''

The currency rose 1 percent to 1,117.80 per dollar as of the 3 p.m. close in Seoul, paring this week's loss to 2.6 percent, according to Seoul Money Brokerage Services Ltd. It lost 17 percent this year, the worst among 10 most-active Asian currencies. The Kospi stock index slumped 4.7 percent this week. Bonds were little changed, with the five-year yield up 3 basis points since Aug. 29 to close at 5.88 percent.

``There's no need to be dispirited by assuming a very bad scenario,'' Bank of Governor Lee Seong Tae told lawmakers yesterday, adding the credit crunch is a ``global phenomenon.''

Lee said the central bank has enough foreign-currency reserves to help protect the economy from external shocks. Central banks intervene in the currency market by either selling or buying foreign exchange.

Won to Stabilize

The currency completed its longest weekly losing streak since April 2001 as speculation swirled that Korea is facing a crisis, akin to the 1997 financial meltdown that almost halved the value of the won and led the country to seek a $57 billion loan from the International Monetary Fund to avoid default.

A report from the central bank today confirmed that gross domestic product increased 4.8 percent in the second quarter from a year earlier, the smallest gain in more than a year.

``Market players are cautious about unrest in global financial markets which is strengthening sentiment for the dollar,'' said Kim Sung Soon, a currency dealer with Industrial Bank of Korea in Seoul. ``Importers' deals and stock sales are knocking the wind out of the won.''

Overseas investors sold more Korean shares than they bought on all but four trading days since the start of last month, Korea Exchange data show. International investors sold a net 3.83 trillion won ($3.4 billion) of shares during the time when the benchmark Kospi stock index slumped 12 percent.

The won will stabilize in coming months as falling oil prices improve the trade balance and as foreign investors take less money out of the country, Ahn Byung Chan, director general of the central bank's international bureau, said today.

Scrapping Ceiling

The government plans to scrap a ceiling on purchases of non-deliverable forwards on the won, seeking to spur demand for the currency, Sohn Byung Doo, director in charge of the currency market at the finance ministry, said today.

The move takes effect from Sept. 8. Non-deliverable forwards are derivatives that oblige traders to exchange one currency for another at a set price and date in the future. Settlements are made in dollars.

Accelerating inflation and a slowing economy prompted funds including Pictet Asset Management Ltd. and Aberdeen Asset Management Plc to move money out of the country. UBS AG and ABN Amro Bank NV this week predicted investors will continue selling the currency on expectations that the economy will falter.

Five-year bonds were little changed after Finance Minister Kang Man Soo said today the government will sell about 7 trillion won of debt in 2009 to help boost fiscal spending and shore up economic growth.

The yield on the 5.25 percent note due March 2013 was at 5.88 percent, according to Korea Exchange. The price of the security was little changed at 100.12. A basis point is 0.01 percentage point.

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