Pictet, Aberdeen Sell Won as Bank of Korea Fights Currency Drop

By Kim Kyoungwha

Sept. 1 (Bloomberg) -- Pictet Asset Management Ltd. and Aberdeen Asset Management Plc are betting the Bank of Korea will lose the battle to stem the won's drop, thwarting its attempt to curb the fastest inflation in a decade.

The won slid 7 percent against the dollar in August, the most in a decade, as price increases and a slowing economy prompted bond and stock funds to move money out of the country. Government currency purchases failed to halt the decline and led to a $16.7 billion drop in foreign-exchange reserves in the four months through July to $247.5 billion.

The slump in reserves ``weakens the hand'' of the central bank, said Wee-Ming Ting, head of Asian fixed income in Singapore for Pictet, part of Switzerland's largest privately held bank for the wealthy. ``We are short the won,'' he said, referring to positions that profit from further declines.

The drop surprised strategists, who forecast at the start of the year that the won would appreciate 5 percent to 890 per dollar, according to a Bloomberg News survey of 22 estimates. Instead, the currency slid to 1,088.9 last week, compared with the median fourth-quarter forecast of 1049.

Consumer prices in Asia's fourth-largest economy climbed 5.9 percent in July from a year earlier, increasing pressure on the central bank to raise its benchmark rate from an eight-year high of 5.25 percent. Confidence among consumers in July was the lowest since 2000 and spending by households, saddled with record debt, fell in the second quarter for the first time in four years.

Stock, Bond Sales

International investors sold a record 25 trillion won ($23 billion) more Korean shares than they bought this year, stock exchange data shows, and the benchmark Kospi stock index fell 22 percent.

Net sales of the nation's bonds totaled $4.2 billion in June and July, snapping a two-year run of monthly purchases, according to central bank figures. Benchmark five-year yields climbed 90 basis points, or 0.90 percentage points, in the past four months to 5.86 percent.

Including dollar sales in the forwards market, the Bank of Korea has spent about $43.7 billion supporting the won this year, according to Richard Yetsenga, a strategist in Hong Kong with HSBC Holdings Plc.

``We have been targeting 1,100,'' Yetsenga wrote in an Aug. 28 report. ``Now that we are in striking distance of that target, it is difficult to see what will stop the move there.''

Vice Finance Minister Kim Dong Soo pledged last week to take action to stem the won's depreciation and Goldman Sachs Group Inc. predicts the government will have some success, forecasting an exchange rate of 1,040 in three months.

`One-Way Bet'

The won is ``not a one-way bet,'' said Goohoon Kwon, a Seoul-based economist with Goldman, the world's biggest securities firm. Policy makers could raise rates, helping attract funds seeking higher returns, he said.

Aberdeen Asset, Scotland's largest independent money manager, is betting the Bank of Korea will fail, forecasting the won will be as weak as 1,200 per dollar in a year's time.

``We have been short the won and are generally negative over the next three to six months,'' said Anthony Michael, who oversees the equivalent of $3.7 billion of Asian assets as the firm's regional head of fixed income in Singapore. ``Growth in Korea is going to slow substantially.''

The $970 billion economy expanded 4.8 percent in the second quarter from a year earlier, the slowest since the first three months of 2007, when it grew 4 percent. The trade balance swung to a deficit in December for the first time in five years.

Overseas Borrowings

An increase in South Korea's overseas borrowings is also driving funds out of the country, said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong.

Short-term overseas debt, external borrowings that mature in a year, almost tripled to $175.65 billion as of June 30 from $65.9 billion at the end of 2005, official figures show.

The increase was mainly caused by exporters' locking in dollar rates for overseas earnings, Bank of Korea Deputy Governor Rhee Gwang-Ju said in a July interview. This year's decline in Asian currencies doesn't signal a repeat of the financial crisis a decade ago because central banks have more reserves, he said.

``Potential difficulties with rolling over the debt may lead to a sharp drawdown of reserves and pressure on the won,'' said Dariusz Kowalczyk, a strategist with CFC Seymour Ltd. in Hong Kong, who has the most bearish estimate in the survey. He predicts the won will end the year at 1,200 per dollar.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.