Korean Won Trades Near a Two-Week High as Improving Economy Draws Funds

South Korea’s won traded near a two- week high and bonds fell as overseas investors added to their holdings of the nation’s shares for a third day, seeking to profit from the improving economy.

The central bank today raised its 2010 economic growth forecast to 5.9 percent, from an April projection of 5.2 percent. The Bank of Korea, which last week lifted its benchmark interest rate by 25 basis points from a record-low 2 percent, also increased its exports estimate to 26.4 percent from 18.6 percent and doubled its prediction for this year’s current-account surplus to $21 billion. Bond yields rose to a four-month high on concern the central bank will further tighten monetary policy this year.

“Fundamentals are really strong and that’s a positive,” said Hur Sang Hoon, a currency analyst at Korea Exchange Bank. “That’s led to higher interest rates, which will attract capital flows looking to take advantage of higher yields.”

The won traded at 1,198.08 per dollar as of 12:50 p.m. in Seoul, from 1,195.85 at the end of last week, according to data compiled by Bloomberg. It’s strengthened 4.3 percent in the past month, the biggest gain among Asia’s 10 most-used currencies, and today reached 1,193.75, the strongest level since June 24. The yield on South Korea’s 3.75 percent bond due June 2013 climbed to a four-month high of 3.97 percent. A basis point is 0.01 percentage point.

Policy makers may intervene to check appreciation that threatens exports, Korea Exchange Bank’s Hur said, predicting that the currency may climb to 1,150 this week. The won is still down 2.7 percent for the year, Asia’s worst performance.

Bonds Fall

Finance Minister Yoon Jeung Hyun said the chances of the global economy slipping back into a recession this year are low, Yonhap News reported yesterday. The government on June 24 boosted its 2010 growth forecast for South Korea to 5.8 percent from a December projection of 5 percent, saying the global recovery has spurred exports and local demand.

“Today’s upward revisions in Korea’s economy is pushing bonds lower because that’s raising the possibility of more rate hikes,” said Peter Park, a fixed-income analyst at Woori Investment & Securities in Seoul. Park expects the Bank of Korea to raise borrowing costs by as much as 50 basis points by the end of the year.

Higher borrowing costs will make investors “less enthusiastic” about buying South Korean government bonds, Park said.

Investors bid to buy 4.63 trillion won ($3.8 billion) of five-year treasuries, or 2.89 times the amount on offer, the Ministry of Economy and Finance said today. That’s the smallest bid amount since March. South Korea sold 1.82 trillion won of notes to yield 4.54 percent, the ministry said.

To contact the reporters on this story: Frances Yoon in Seoul at fyoon2@bloomberg.net

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