Korea Won Falls to Lowest Since 1998 as Dollar Shortage Deepens

By Kim Kyoungwha

Oct. 8 (Bloomberg) -- South Korea's won slumped to the lowest in a decade as a seizure in global credit markets forced banks and companies to tap currency exchanges to meet their dollar-financing requirements. Government bonds rose.

The won fell as much as 5.1 percent today to a level last seen during the Asian financial crisis, when the nation had to take out a $57 billion emergency loan from the International Monetary Fund to meet overseas debt payments. The government will check for ``speculative forces'' in the market and use its foreign-exchange reserves to defend the currency, Deputy Finance Minister Shin Je Yoon said yesterday.

``The overall tone in the market is bleak with traders extremely cautious about taking won positions in spite of repeated assurances from the government,'' said Kim Sung Soon, a currency dealer with Industrial Bank of Korea in Seoul. ``There's persistent real demand for dollars from companies.''

The won fell 4.8 percent to 1,395 per dollar at the 3 p.m. close of trading, according to Seoul Money Brokerage Services Ltd. It touched 1,399, the lowest level since September 1998.

The government may delay its plan to further open the foreign-exchange market, the Korea Economic Daily reported, citing a finance ministry official it didn't identify. The delay is being considered as the local market faces a dollar shortage amid the global credit crunch, the newspaper said. The government will announce details next month, the report said.

Stock Sales

Korea's Kospi stock index fell 5.8 percent today, extending this year's drop to 32 percent. Overseas investors sold more of the country's shares then they purchased on all but 15 days since May as turmoil in financial markets prompted investors to favor safer bets than emerging-market assets.

South Korea has been building up its foreign-exchange reserves over the past decade to prevent a repeat of the financial crisis that caused the won to halve in value against the dollar in 1997. Those reserves fell for a fifth month in August to $243.2 billion, according to the central bank, as policy makers intervened to stem the won's slide.

Local money-market rates have risen as banks have become increasingly reluctant to lend. The rate on three-month commercial paper, unsecured debt instrument issued by corporations, climbed to 6.65 percent, the highest since 2001, according to a data compiled by Bloomberg.

Bonds Gain

Three-year bonds gained for a second day on speculation the central bank will reduce interest rates in tandem with its counterparts abroad to spur lending.

The Reserve Bank of Australia yesterday cut its benchmark rate by a percentage point to 6 percent, the biggest reduction since 1992, and the Hong Kong Monetary Authority today dropped its base lending rate a similar amount to 2.5 percent. Bank of Korea Governor policy makers meet tomorrow to review rates. The bank kept its benchmark at an eight-year high of 5.25 percent last month.

The yield on the 5.5 percent note due June 2011 fell 1 basis point to 5.64 percent, according to Korea Exchange Inc. The price gained 0.07, or 7 won per 10,000 won face amount, to 101.90. A basis point is 0.01 percentage point.

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