Korea Won Weakens, Snaps 5-Day Gain, as Stocks Fall; Bonds Drop

By Kim Kyoungwha

Dec. 22 (Bloomberg) -- South Korea’s won weakened, ending a five-day winning streak, as the benchmark stock index retreated from an almost two-month high, raising speculation that foreign investors may reduce their share purchases. Bonds fell.

The currency, Asia’s worst performer this year, rose in each of the last two weeks, on speculation policy makers intervened to support the exchange rate. The Kospi share index declined after five days of gains.

“With stocks turning lower, demand for the won weakened,” said Ko Yun Jin, a currency dealer with Kookmin Bank in Seoul. “A rise above 1,300 in the won is also triggering a bout of importers’ deals, putting a brake on further strength.”

The won fell 1.3 percent to 1,307.50 per dollar as of the 3 p.m. close, compared with 1,290 at the end of last week, according to Seoul Money Brokerage Services Ltd. It dropped 29 percent this year, Asia’s worst performance.

The Bank of Korea provided $4 billion of U.S. currency in loans to local banks struggling to secure foreign funds at an average yield of 2.36 percent. It used its currency-swap line with the Federal Reserve for the third time to provide the dollars, the bank said in Seoul today. The bank supplied $3 billion on Dec. 9 and $4 billion from the swap on Dec. 2.

The one-year cross currency swap stood at 0.3 percent, having recovered from a record low of minus 0.7 percent on Dec. 4. The rate, a gauge of the availability of dollar funding, averaged 3.3 percent this year before the collapse of Lehman Brothers Holdings Inc. in mid-September caused credit markets to freeze.

‘Little Zeal’

Demand for the won strengthened on speculation dollar liquidity is improving after a seizure in credit markets helped drag the local currency to a decade-low last month.

Yonhap News reported that the government has reached a tentative conclusion that a liquidity crisis stemming from the shortage of U.S. currency in local financial markets is over.

The country isn’t likely to experience a further severe shortage in foreign-currency liquidity because the government and central bank have undertaken measures to pump dollars into the financial system, Yonhap said, citing an official from the Ministry of Strategy and Finance it didn’t identify.

“Banks have little zeal for trading for now as the authorities stayed in the market to manage year-end foreign exchange,” said Lee Myung Hoon, a currency dealer with Industrial Bank of Korea in Seoul. “There’s a perception that the dollar funding crisis is over.”

Government bonds fell. The yield on the benchmark bond due September 2013 rose 5 basis points to 4.21 percent, according to the Korea Exchange. The price dropped 0.23, or 23 won per 10,000 won face amount, to 108.13. A basis point is 0.01 percentage point.

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