Korean Won Weakens as Global Funds Sell Shares; Bonds Advance

By Kim Kyoungwha

Jan. 8 (Bloomberg) -- South Korea’s won weakened, snapping a three day gain, as stock slides in the U.S. and Asia damped demand for riskier assets. Bonds rose.

The currency, Asia’s worst performer of 2008, fell as foreign investors sold more Korean shares than they bought for the first time in seven days. The Kospi stock index slid 1.8 percent, after yesterday posting its highest close in almost three months.

“The currency’s rally this week was seen as temporary,” said Lee Myung Hoon, a currency dealer with Industrial Bank of Korea in Seoul. “Sentiment was buoyed by expectations the new year would be different, but people are waking up to reality.”

The won fell 3 percent to 1,333 per dollar as of the 3 p.m. close in Seoul, according to Seoul Money Brokerage Services Ltd. The currency’s 15 percent gain in December, the best month in a decade, pared last year’s drop to 26 percent. It will slide to 1,425 per dollar this quarter, according to the median forecast of analysts surveyed by Bloomberg News.

The economy may shrink in the first half of 2009 amid a slowdown in exports, rising unemployment and frail consumption, President Lee Myung Bak said last month. It probably contracted in the last quarter of 2008 for the first time in five years, the central bank said.

Bonds Gain

Government bonds rose as economists predicted the central bank will cut interest rates further. The yield on the benchmark bond due September 2013 fell 14 basis points to 3.77 percent, according to the Korea Exchange. The price of the security rose 0.64, or 64 won per 10,000 won face amount, to 110.31. A basis point is 0.01 percentage point.

Nomura International Ltd. said South Korea’s economy will contract this year, reversing its earlier forecast of an expansion, as exports and domestic demand weaken.

“In light of recent data, which were substantially weaker than we had expected, we have revised our forecasts to show a recession,” Kwon Young Sun, a Hong Kong-based economist at Nomura, wrote in a report today. “We expect the Bank of Korea to respond aggressively.”

Nomura estimates the economy will shrink 2 percent in 2009, the first annual contraction since 1998, after previously predicting 1.3 percent growth. The central bank is likely to cut the benchmark interest rate by 75 basis points to 2.25 percent tomorrow, he said.

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