South Korean Won Falls to Three-Month Low on Recession Concern

By Bob Chen

Feb. 20 (Bloomberg) -- South Korea’s won weakened beyond 1,500 per dollar for the first time in three months on concern falling exports will worsen a shortage of dollars and strain banks’ ability to repay debt.

The currency has plunged 16 percent so far this year, making it the worst performer among the 10 most-traded Asian currencies outside Japan. Rising U.S. and European government bond sales will lead to a “crowding out” of developing-nation debt, making it harder for them to roll over maturing obligations, Nick Chamie, global head of emerging markets research in Toronto at RBC Capital Markets, wrote in a report yesterday.

“The won has come under pressure with concerns about dollar funding in Korea and repaying of short-term debt,” said Callum Henderson, head of global currency strategy at Standard Chartered Plc in Singapore. “There’s a significant amount of short-term debt coming due, but compared to the fourth quarter last year, it’ll be less of a problem this time around.”

The won declined 1.3 percent to 1,500 per dollar as of 11:13 a.m. in Seoul, headed for a weekly drop of 6.4 percent, according to Seoul Money Brokerage Services Ltd. It earlier touched 1,507, the weakest level since Nov. 26.

South Korean banks’ demand for dollars is decreasing as foreign-currency debt maturing every month this year is at least 50 percent lower than in the fourth quarter, a central bank official said this week.

Debt Payments

Monthly foreign debt payments have dropped to about $4 billion, from between $8 billion and $9 billion in the final three months of 2008, Ahn Byung Chan, director general of the Bank of Korea’s international bureau, said Feb. 17.

A pool of Asian nations’ foreign-exchange reserves formed to enhance the region’s financial stability will be expanded to $120 billion from $80 billion, Yonhap News reported, citing an official at South Korea’s finance ministry it didn’t name. Asian financial officials meeting in Thailand will announce the decision on Feb. 22, according to the report.

Five-year bonds gained, with the yield on the 5.75 percent bond due September 2013 falling 7 basis points to 4.64 percent.

“The yield is down today as investors seem to be betting that the government may issue more short-and medium-term debt rather than long-term securities,” said Seo Chul Soo, a fixed- income analyst at Daewoo Securities Co.

The Korean government needs to issue more bonds as it plans to increase stimulus spending to revive an economy that had its worst contraction last quarter since the 1997-1998 Asian financial crisis.

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net