Korean Won Gains as Global Funds Purchase Stocks; Bonds Advance

By Kim Kyoungwha

April 13 (Bloomberg) -- South Korea’s won strengthened, erasing an earlier loss, as overseas investors increased their holdings of local equities for the third day in a row. Government bonds gained.

The currency approached the highest level since Jan. 7, extending its gains in the past month to 12.5 percent, the best performance among the 10 most-traded Asian currencies outside Japan. The currency earlier slid as much as 0.7 percent on speculation demand for dollars rose as some investors repatriated dividends.

“Foreign investment in stocks propelled the won higher, providing a buffer to a market that was weighed down by dividends and import settlements,” said Jo Hyun Suk, a currency dealer with Korea Exchange Bank in Seoul. “The gains accelerated as banks also offloaded their dollar holdings.”

The won gained 0.2 percent to 1,329.50 per dollar at the 3 p.m. local close, according to data compiled by Bloomberg. The benchmark Kospi share index rose 0.2 percent, building on five weeks of gains.

The Bank of Korea forecast last week that the economy will shrink 2.4 percent this year, the first contraction since 1998, before expanding 3.5 percent in 2010. Governor Lee Seong Tae said the pace of the nation’s economic slowdown has “moderated significantly.”

Lowering Swaps

The central bank will lower the amount of 84-day swaps it offers to banks to $2 billion from the $3 billion that mature this week, according to an e-mailed statement in Seoul.

The amount on offer was reduced after the nation posted a record $4.6 billion trade surplus in March and it will post another “significant” one this month after crude oil imports fell, the bank said.

The central bank will offer $2 billion to lenders in the local-currency swap market tomorrow, it said today on its Web site. It has supplied dollars to banks through weekly auctions as a global financial crisis made it hard for them to raise foreign exchange.

Local currency bonds rose as demand at a government auction improved. The finance ministry today sold 2.83 trillion won ($2.1 billion) of five-year bonds at a yield of 4.55 percent. Investors offered to buy 4.87 trillion won of bonds, or 1.72 times the amount on offer, the ministry said on its Web site today. That compares with a so-called bid-to-cover ratio of 1.05 at the previous auction of similar-maturity debt on March 9.

“The outcome was favorable with participation by long term investors pretty high,” said Kim Do Sung, a futures analyst with PB Futures Co. in Seoul. “The high bid-to-cover ratio signaled some momentum in the market.”

The yield on 4.75 percent debt due in 2014 fell six basis points to 4.551 percent, according to Korea Exchange. The three- year yield declined two basis points to 3.88 percent.

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