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Korean Won Reverses Loss on UN Inspection; Bonds Pare Slide

South Korea’s won rebounded from a four-week low after the North agreed to allow United Nations nuclear inspectors to return to the country, easing concern over tensions with its communist neighbor.

The currency earlier slumped 1.7 percent after the government proposed curbs on capital flows and the military started a live-firing exercise that has prompted threats of retaliation from the North. Bonds pared losses as New Mexico Governor Bill Richardson secured an agreement from North Korea to create a military hotline with the U.S., Agence France-Presse reported, citing a CNN report.

“The won was supported in late trading because of the news about North Korea being more cooperative,” said Frances Cheung, a senior strategist at Credit Agricole CIB. “But political tension is still weighing heavily on the currency.”

The won gained 0.2 percent to 1,150.25 per dollar at the 3 p.m. close in Seoul, according to data compiled by Bloomberg. It earlier reached 1,172.25, the weakest level since Nov. 24. The yield on the 3 percent bond maturing in December 2013 rose two basis points to 3.37 percent after touching 3.4 percent.

Artillery positions on Yeonpyeong Island, which was shelled by the North last month, began the exercise at 2.30 p.m. local time after fog cleared, said a defense ministry official who declined to be named, citing government policy.

Foreign Borrowings

Live-fire drills “would make it impossible to prevent the situation on the Korean peninsula from exploding,” North Korea’s state-run Korean Central News Agency cited the Ministry of Foreign Affairs as saying on Dec. 18. South Korea sees no reason to abandon the exercise just because other nations say it shouldn’t happen, a military spokesman said yesterday.

The United Nations Security Council failed to agree on steps to address discord on the peninsula at an emergency meeting yesterday as China blocked moves to condemn the North and Russia urged that the drills be scrapped.

The government said yesterday it aims to apply a levy on banks’ foreign-exchange borrowings, will strengthen punishment for inappropriate reporting of currency trades and may tighten rules on derivatives. It is considering a 20 basis-point levy on overseas debt maturing in less than one year, Vice Finance Minister Yim Jong Yong said.

The bank levy will be imposed on non-deposit foreign- currency liabilities held by all domestic and foreign lenders, according to a joint statement released yesterday by the Ministry of Strategy and Finance, the Bank of Korea and the Financial Supervisory Service.

To contact the reporters on this story: Andrea Wong in Taipei at awong268@bloomberg.net; Saeromi Shin in Seoul at sshin15@bloomberg.net.

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Darren Boey at dboey@bloomberg.net

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