South Korean Won Jumps Most Since 1997 as Fed Provides Dollars

By Kim Kyoungwha

Oct. 30 (Bloomberg) -- South Korea's won jumped the most since December 1997 after the Federal Reserve agreed to provide $30 billion to the country's central bank, helping ease a shortage of U.S. currency facing banks and companies. Bonds rose.

The currency, which two days ago sank to a decade-low 1,495 won per dollar, strengthened as policy makers stepped up efforts to restore confidence in financial markets. Finance Minister Kang Man Soo said today the government is also seeking to expand currency swaps with Japan and China.

``The swap program will address lingering concerns among investors about the adequacy of Korea's foreign reserves and hence be supportive of the won,'' said Kwon Goohoon, an economist with Goldman Sachs Group Inc. in Seoul. ``The swap program will also likely help facilitate the rollover of foreign debt by local banks.''

The won rose 14 percent to 1,250 per dollar at 3 p.m. in Seoul, the most since the currency soared 23 percent on Dec. 26, 1997, according to Seoul Money Brokerage Services Ltd. That pared this year's loss to 25 percent, still the worst among the 10 most-traded Asian currencies excluding the yen.

The Fed opened swap lines with Brazil, Mexico, South Korea and Singapore, effective until April 30, it said yesterday in a statement. The Bank of Korea will have access to U.S. dollar funds in exchange for won through the arrangement with the Fed.

Smaller Deficit

Forward contracts on the won rallied for a second day, signaling that the currency will strengthen to 1,222 in a year. One-month implied volatility for one-month dollar-won options fell to 60 percent from 69.5 percent, according to data compiled by Bloomberg News.

Forwards are agreements in which assets are bought and sold at current prices for delivery at a specified future date. Non- deliverable contracts are settled in dollars.

The won may benefit after the central bank announced today that the nation's current-account deficit narrowed in September from a record. The shortfall shrank to $1.22 billion from $4.7 billion in August, the Bank of Korea said in Seoul today. The current account is the broadest measure of trade, tracking goods, services and investment income.

``The trend looks good as we expect a small current-account surplus in October,'' said Seo Chul Soo, a fixed-income analyst at Daewoo Securities Co. in Seoul. ``It's good news for the local financial markets, especially the currency market.''

Bonds Advance

Korea's government bonds rose on optimism that the central bank will lower borrowing costs once the currency market stabilizes on the back of the swap agreement. The yield on the 5.5 percent note due June 2011 fell 14 basis points, or 0.14 percentage point, to 4.38 percent, according to Korea Exchange. The price rose 0.36, or 36 won per 10,000 face amount, to 104.86.

``The swap deal removed the biggest headache -- the foreign currency shortage,'' said Kong Dong Rak, a fixed income strategist with Hana Daetoo Securities Co. in Seoul. ``It will enable the central bank to push ahead with more rate cuts as the currency market regains stability.''

The Bank of Korea delivered its first reduction in four years on Oct. 9 and cut the benchmark interest rate by a record 75 basis points to 4.25 percent this week.

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