Oct. 27 (Bloomberg) -- South Korea's won dropped, reversing earlier gains, after the central bank unexpectedly cut interest rates for the second time in less than three weeks. Bonds rose.

The won has slumped 30 percent against the dollar in the past three months, the biggest loss among Asia's 10 most-traded currencies outside of Japan, as investors dumped emerging-market assets on concern a global credit crisis will drive the world's biggest economies into recession. The Kospi stock index tumbled 20 percent last week, the most in eight years, as the central bank reported the slowest economic growth since 2004.

``Demand for dollars is still there,'' said Ko Yun Jin, a currency dealer with Kookmin Bank in Seoul. ``The rate cut itself isn't a plus for the won. There's no sign that foreigners will halt their sales of stocks for now.''

Korea's currency fell 1.3 percent to 1,442.50 against the dollar as of 3 p.m. in Seoul, according to Seoul Money Brokerage Services Ltd. The currency, which earlier rose as much as 3.2 percent, reached a decade-low 1,485 on Oct. 9.

President Lee Myung Bak yesterday convened a meeting of the nation's top economic policy makers, including Finance Minister Kang Man Soo and Bank of Korea Governor Lee Seong Tae, to discuss measures to deal with the financial turmoil and prevent a recession.

South Korea's gross domestic product rose 0.6 percent in the third quarter from the previous three months, when it increased 0.8 percent, the central bank announced Oct. 24. Policy makers today lowered its seven-day repurchase rate by a record 0.75 percentage point to 4.25 percent.

`Fragile' Sentiment

The cut follows the first reduction in four years on Oct. 9. The bank also broadened the type of bonds it will accept as collateral in money-market operations, giving lenders access to more funds. The bank said today it would ease rules on foreign- currency lending to help local exporters.

``Sentiment remains fragile amid the ongoing global crisis,'' said Lee Myung Hoon, a currency dealer at Industrial Bank of Korea in Seoul. ``The rate cut will bring some comfort back to wobbly financial markets.''

Goldman Sachs Group Inc. forecast today the won will climb 25 percent over the next six months as lower commodity prices reduce the nation's import bill and interest-rate cuts help the economy avoid a recession. The currency will strengthen to 1,250 versus the dollar in three months and to 1,150 in six months, economists Eva Yi and Kwon Goo Hoon wrote in a report.

Local government bonds soared, pushing the benchmark three- year yield to the lowest in more than three years, after the central bank's rate reduction was announced.

The yield on the 5.5 percent note due June 2011 slid 44 basis points, or 0.44 percentage point, to 4.52 percent, according to Korea Exchange. The price of the security rose 1.11, or 111 won per 10,000 face amount, to 104.47.

`Big Surprise'

``It came as a big surprise to the market,'' said Nam Goong Won, a fixed-income fund manager with Korea Exchange Bank in Seoul. ``The size of the reduction was more than the market anticipated. Now it's a matter of how much it can affect the money-market rates to ease a shortage of funds.''

The worst financial turmoil in a decade, stemming from a collapse of U.S. mortgage markets, is causing a shortage of cash for local banks and companies to service debt. Policy makers have funneled cash by cutting rates, guaranteeing bank debt and making more funds available for small businesses.

The rate on 91-day certificate of deposits, a key money market rate in Korea, fell to 6.03 percent today after rising to 6.17 percent on Oct. 24, the highest level since January 2001.

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

Last Updated: October 27, 2008 02:26 EDT