July 8 (Bloomberg) -- South Korea's won rose to a two-week high on speculation the central bank is intervening to strengthen the currency and slow inflation at the fastest in a decade. Government bonds gained.

The won advanced for a second day after the Ministry of Finance and Bank of Korea said yesterday they will use the nation's $258 billion foreign-exchange reserves to support the currency. President Lee Myung Bak yesterday sacked Vice Finance Minister Choi Joong Kyung, in charge of currency policy, as the won slid as much as 11.5 percent versus the dollar this year.

``It seems that there was an intervention this morning,'' said Jung Chan Ho, a currency dealer in Seoul at Shinhan Bank, a unit of South Korea's second-biggest financial group. ``The intervention could be $1 billion or more.''

The won gained 1 percent to 1,032.70 against the dollar as of the 3 p.m. close of local trading, according to Seoul Money Brokerage Services Ltd. The currency touched 1,026, the strongest since June 20. The won is the world's best performing major currency in the past two days.

The government, which previously advocated a weaker won, has changed its stance as record oil prices push up import costs and widened the current-account deficit. Deputy Finance Minister Shin Je Yoon pledged today that authorities will maintain a stable currency policy.

The financial authorities bought about $7 billion of won since the end of May to help boost the currency, JoongAng Ilbo newspaper reported July 1. The government doesn't disclose its actions in the currency market. Central banks intervene in currency markets by buying or selling foreign exchange.

Exports Slowing

Export growth slowed to 17 percent in June as shipments to Europe fell and truck drivers went on strike to protest rising prices. Overseas investors sold more local shares than they bought for the past 22 days as President Lee said on July 6 he may lower his economic growth target for the next two years.

Consumer prices rose 5.5 percent in June from a year earlier, the biggest increase since 1998, as crude oil climbed toward a record $145.85 per barrel on July 3. Korea imports almost all of its energy needs. A weaker currency pushes up the costs of imports.

``We are still underweight on the won due to oil prices, slowing growth and the current-account deficit,'' said Thomas Harr, a senior currency strategist at Standard Chartered Plc in Singapore. ``We will have to monitor the foreign-exchange intervention as they could get quite aggressive.''

Higher Reserves

Asia's policy makers have been accumulating foreign- exchange reserves since countries in the region spent most of their reserves to support their currencies during the 1997-1998 financial crisis.

``The government has set top priority on stabilizing inflation and we will have to manage the foreign-exchange market to meet that goal,'' Choi Jong Ku, head of the finance ministry's international finance bureau, said yesterday. ``We will use foreign-exchange reserves again if necessary'' to curb the won's decline, he said.

Government bonds rose on speculation inflation may have peaked as the authorities act to strengthen the currency, helping to preserve the value of the fixed payments from debt.

``More investors seem to think inflation may ease as the government intervened in the foreign-exchange market to keep the won from falling,'' said Ra Woo Sik, a fund manager in Seoul at the Industrial Bank of Korea, the country's biggest lender to small- and medium-sized companies.

The yield on the 5.5 percent note due September 2017 fell 2 basis points to 6.11 percent, according to Korea Exchange. The price climbed 0.15, or 15 won per 10,000 won face amount, to 97.55. A basis point is 0.01 percentage point.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net.

Last Updated: July 8, 2008 03:51 EDT