Korean Won Rises a Third Week as Global Stocks Jump; Bonds Fall

By Bob Chen

March 27 (Bloomberg) -- South Korea’s won strengthened for a third week as a rally in global stocks bolstered investors’ appetite for risk. Bonds slid.

The currency touched a two-month high against the dollar after a central bank report showed the economy shrank less than initially estimated in the fourth quarter and the government this week unveiled a 17.7 trillion won ($13.1 billion) extra spending package. Foreign investors bought more local stocks than they sold for a ninth day, helping drive the Kospi Index to a five-month high this week.

“The Korean won had been one of the harder-hit currencies in recent months, so it’s reasonable that it enjoys one of the nicer rebounds as investor sentiment has improved in the past few weeks,” said David Cohen, director of Asian forecasting at Action Economics in Singapore.

The won was at 1,349 per dollar as of the 3 p.m. local close, 4.7 percent stronger than last week, according to Seoul Money Brokerage Services Ltd. It earlier reached 1,307.50, the highest level since Jan. 8.

It declined 1.4 percent today, paring the week’s gains, after a technical indicator signaled the currency would change direction. The dollar-won’s 14-day relative strength index, which measures the momentum of a security, was at 29 yesterday, according to data compiled by Bloomberg. A level below 30 or above 70 indicates a reversal may occur.

“There was a large selling order, selling of the won onshore in Korea that pushed up dollar-won,” said Gerrard Katz, head of foreign-exchange trading at Standard Chartered Plc in Hong Kong. “The market’s been caught a little bit short. I’m not sure whether this rally in the dollar will be sustained. Given it’s Friday, the market’s a little thinner.”

Economy Shrinks

The MSCI Asia-Pacific Index of shares was poised for a third weekly gain after the Standard & Poor’s 500 Index added 2.3 percent yesterday, headed for a monthly gain of 13 percent.

South Korea’s gross domestic product shrank a revised 5.1 percent in the fourth quarter, the central bank reported today. That’s less than the previously reported 5.6 percent decline and follows a 0.2 percent expansion in the three months to September. The quarterly contraction was the biggest since 1998.

“It’s hard to make a judgment on whether the economy hit the bottom or when it will bottom out,” Choi Chun Sin, director general at the central bank’s economic statistics department told reporters in Seoul.

Bonds Slide

Local-currency bonds fell this week on concern government debt auctions will overwhelm investor demand as the government steps up spending to help revive the economy, which contracted last quarter at the fastest pace in a decade.

The government will sell a record 81.6 trillion won of bonds in 2009, 57 percent more than last year, the Ministry of Strategy and Finance said March 25, as it drafts a 29 trillion won extra spending plan to support the economy. That’s 9.6 trillion won less than it originally planned to sell.

The yield on the benchmark bond due March 2014 rose 36 basis points this week, or 0.36 percentage point, to 4.57 percent, according to Korea Exchange. The three-year note yield climbed 21 basis points to 3.73 percent.

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