South Korean Won Falls as Global Funds Sell Assets; Bonds Gain

By Kim Kyoungwha

Nov. 12 (Bloomberg) -- South Korea's won weakened for a second day as overseas investors increased sales of the nation's stocks as a global economic slump deterred investment in emerging markets. Bonds rose.

The currency has dropped 31 percent this year, Asia's worst performance, as foreign investors pulled $37 billion out of Korean equities. Global funds also sold more local debt than they bought in October, after net purchases in the previous two months. Fitch Ratings downgraded its default ratings outlooks for Korean banks to negative yesterday, after lowering the sovereign ratings outlook to negative.

``The currency market is taking a cue from the stock markets that show investor sentiment remains bruised by the ongoing financial crisis worldwide,'' said Kim Sung Soon, a currency dealer with Industrial Bank of Korea in Seoul. ``Selling for the won far outweighs purchases.''

The won fell 2.2 percent to 1,359.50 per dollar at the 3 p.m. close in Seoul, according to Seoul Money Brokerage Services Ltd.

Finance Minister Kang Man Soo said his government was cooperating with the central bank to support financial markets.

``The government and the central bank have taken steps to help stabilize markets and will continue to work together,'' Kang said at a meeting in Gwacheon today. ``The global financial turmoil is spreading to affect the real economy. We need to find ways to create more jobs, especially for younger people.''

Global trade will contract 2.5 percent in 2009, after growth of 5.8 percent this year, and economic expansion will slow to 1 percent from 2.6 percent, according to World Bank estimates published yesterday in Washington. South Korea's Kospi stock index fell 0.4 percent, declining for a second day.

Bonds Advance

Bonds advanced, snapping a three-day decline, as a global equities slump encouraged local investors to seek the safety of government debt.

The yield on the benchmark 5.5 percent note due June 2011 fell 12 basis points to 4.91 percent, according to the Korea Exchange. The price rose 0.32, or 32 won per 10,000 won face amount, to 103.73. A basis point is 0.01 percentage point.

Government bonds will climb through the first half of 2009, driving three-year yields to the lowest since 2004, as the central bank cuts interest rates, Citigroup Inc. said.

``The Bank of Korea would eventually shift its stance into more proactive policy as downside risk for growth becomes more clear,'' Seoul-based economist Oh Suk Tae wrote in a report dated yesterday. ``Bond yields would decline significantly.''

The yield on the benchmark three-year notes will fall to 3.3 percent by the end of June, Oh said. The Bank of Korea will slash its interest rate by a percentage point to 3 percent by end-March, adding to 125 basis points of cuts since the start of October, he forecast.

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