Korea Won Set for Weekly Loss as Funding Costs Rise; Bonds Gain

By Kim Kyoungwha

Dec. 5 (Bloomberg) -- South Korea’s won headed for a weekly decline against the dollar on speculation increases in funding costs will make it harder for local companies to meet foreign debt payments. Bonds rose.

The currency extended this year’s slide to 37 percent as the prospect of a recession prompted investors to cut their holdings of emerging-market assets. The government will prepare more measures to boost the economy that faces a “difficult” time in the first half of 2009, Vice Finance Minister Kim Dong Soo said today in Seoul.

“Concerns over a shortage of dollars remain with the funding difficulties at banks not showing any sign of thawing,” said Park June Geun, a currency dealer in Seoul at BNP Paribas, Europe’s third-largest bank by market value. “The won may test 1,500 during the day.”

The won fell 1.5 percent this week to 1,490.95 per dollar as of 10:09 a.m. local time, according to Seoul Money Brokerage Services Ltd. It dropped 0.9 percent today, its fourth consecutive loss.

Korea’s one-year cross-currency swap rate was below zero for a record 12th day as funding costs rose on concern year-end demand for cash will increase even after the central bank cut interest rates three times since October and made access to funds easier.

The one-year currency swap was at minus 0.55, after touching a record minus 0.7 yesterday. The rate, a measure of the scarcity of U.S. currency, averaged 3.3 percent in the five years before July 2007.

Adding to losses in the won, global funds sold more Korean shares than they bought for a fourth day, according to Korea Exchange. Investors pulled $37 billion out of Korean shares this year, data compiled by Bloomberg show.

Bonds Advance

Korea’s bonds rallied this week on prospects the central bank will lower borrowing costs again on Dec. 11 after cutting the key interest-rate for the third time in a month to spur the economy. The key rate stands at 4 percent, the lowest since 2006.

Signs of an economic slowdown whetted investors’ appetite for the relative safety of government debt, pushing the benchmark five-year yield to the lowest since 2005. The economy grew 0.5 percent last quarter, the weakest pace since 2004.

The yield on the benchmark bond due September 2013 fell 50 basis points, or 0.5 percentage point, to 4.5 percent, according to the Korea Exchange. The price rose 2.3, or 230 won per 10,000 face amount, to 106.68.

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