Korea Won Falls, Ending 4-Day Decline, on Importers; Bonds Gain

By Kim Kyoungwha

March 12 (Bloomberg) -- South Korea’s won fell for the first time in five days on speculation importers are taking advantage of this week’s gains to pay bills. Bonds rose on optimism that the central bank will buy debt from the market.

The won extended its decline after the Bank of Korea left its seven-day repurchase rate at a record-low 2 percent, following six cuts since early October. The currency climbed 6.6 percent against the dollar over the last four trading days, paring this year’s loss to 15 percent, as a rally in global stocks helped revive demand for emerging-market assets.

“There are some dollar purchases by banks and companies after the won’s recent rally,” said Jo Hyun Suk, a currency dealer with Korea Exchange Bank in Seoul. “The central bank’s move had little impact on the foreign-exchange market and the undercurrent is still cautious.”

The won weakened 1.7 percent to 1,496.50 per dollar as of 3 p.m. in Seoul, according to Seoul Money Brokerage Services Ltd. The Kospi stock index was 0.1 percent higher and global funds sold more local shares than they bought after two days of net purchases, according to Korea Exchange.

“There seems to be buying of dollars by importers but the drop in the won may be limited, depending on the performance of stocks and foreign purchases,” said Ko Yun Jin, a currency dealer with Kookmin Bank in Seoul.

The currency’s drop today was also linked to Royal Philips Electronics NV’s sale of its stake in LG Display Co., which increased demand for dollars, Cho of Korea Exchange said. Philips sold its remaining 13.2 percent stake in Seoul-based LG Display at 25,500 won a share yesterday.

Economic Forecast

Twelve of 15 economists surveyed by Bloomberg News before today’s interest-rate decision forecast the central bank would announce a reduction of at least of quarter of a percentage point to help the economy.

South Korea will probably “remain in recession due to the persistent weakness of both domestic and overseas demand,” the central bank said today. It estimated that the current account swung to a surplus in February after a shortfall in January.

Trade Minister Lee Youn Ho called the won at 1,500 “absurd” given the improving trade balance in a meeting with business leaders in Seoul, MoneyToday reported today.

The Korean currency will strengthen to 1,300 won a dollar by the end of 2009, according to the median forecast of 28 strategists surveyed by Bloomberg. It reached an 11-year low of 1,597 on March 6.

Tourism Boom

The currency’s weakness is helping draw tourists, notably from Japan after the yen rose 61 percent versus the won in the past year. Almost a quarter of a million Japanese visited in January, 55 percent more than a year earlier, according to the Korea Tourism Organization.

Bank of America Corp., the largest U.S. bank by assets, forecast the won will jump to 13.8 against the yen in three months. Standard Chartered Bank Plc, a London-based bank that makes most of its profit in Asia, predicted 13.07 by Dec. 31. The won reached a record low of 16.42 on March 3 and recently traded at 15.31.

Local-currency bonds rose as investors bet the central bank will step in to buy debt as the government increases public spending.

Bank of Korea Governor Lee Seong Tae said he expects the government to propose “a significant” extra spending package, financed through bond sales. The central bank will watch the effect of debt sales on financial markets as it decides whether to purchase bonds, he added.

The yield on three-year government bonds fell seven basis points to 3.62 percent and the five-year yield fell 13 basis points to 4.40 percent, according to Korea Financial Investment Association.

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