Korean Won Rebounds on U.S. Bailout Speculation; Bonds Decline

By Bob Chen and William Sim

Oct. 1 (Bloomberg) -- South Korea's won rebounded from a five-year low on optimism U.S. lawmakers will salvage a $700 billion bank rescue bill, helping to sustain spending and bolstering demand for emerging-market assets. Bonds fell.

The Korean currency ended seven days of losses after U.S. Senate Majority Leader Harry Reid said yesterday approving the legislation remains a top priority after it was voted down in the House of Representatives two days ago. South Korea's Vice Finance Minister Bae Kook Hwan said the government expects the won to stabilize soon as the current account returns to a surplus in October due to lower oil prices.

``The won is stronger today, but it's still near its weakest level in a few years,'' said David Cohen, an economist at Action Economics in Singapore. ``It seems like Congress didn't know what they were getting into when they rejected that bailout, and the market gave them a slap in the face. Now there's a little more sense of calm returning.''

The won rose 1.7 percent to 1,187 per dollar at the 3 p.m. close, according to Seoul Money Brokerage Services Ltd. The currency gained as much as 2.2 percent after yesterday touching the weakest level since April 2003.

South Korea's government will be ``flexible'' in efforts to counter fallout from the global financial turmoil, Vice Finance Minister Bae said today on SBS radio in Seoul.

The government plans to provide at least 4.3 trillion won ($3.62 billion) in extra loans to small and medium-sized companies struggling from higher costs and losses related to currency risks, the Financial Services Commission said today in an e-mailed statement.

Exports Increase

The won also rallied after yesterday completing its worst quarterly decline since the 1997 Asian financial crisis as a government report today showed Korea's export growth accelerated in September.

Overseas shipments, which make up more than half of gross domestic product, climbed 28.7 percent from a year earlier, the Ministry of Knowledge Economy said. That compares with an 18.7 percent in gain in August.

The won has slumped more than 21 percent this year against the dollar, helping exporters by making their products cheaper overseas at the same time as driving up local prices by boosting the cost of imports.

Bonds Decline

Local-currency bonds fell as a government report showed inflation slowed last month but remained above target levels.

Five-year notes ended two days of gains as the National Statistical Office said consumer prices rose 5.1 percent from a year earlier, after climbing 5.6 percent in August. Still, that's higher than the central bank's target to keep inflation between 2.5 percent and 3.5 percent for the three years to 2009.

``The yield is rising today as investors are still concerned about high inflation because of the won's big drop this year,'' said Seo Chul Soo, a fixed-income analyst at Daewoo Securities Co. in Seoul. ``The market will stay in a narrow range until the Bank of Korea's monthly rate-setting meeting next week.''

The yield on the 5.75 percent note due September 2013 rose 3 basis points to 5.78 percent, according to the Korea Securities Dealers Association. The price fell 0.058 won, or 6 won per 10,000 won face amount, to 100.031. A basis point is 0.01 percentage point.

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net.