Won Weakens, Bonds Gain as Stock Losses Deter Risk-Taking

South Korea’s won retreated from a six-month high and government bonds advanced as global stock declines deterred investors from taking riskier bets.

The Standard & Poor’s 500 Index slid yesterday from the highest level since 2007 amid concern rising bond yields will prompt Spain to seek financial aid. Policy makers must control volatile capital flows as quantitative easing measures taken in the U.S. and Europe have a negative spillover in developing countries, Bank of Korea Governor Kim Choong Soo said Sept. 14. The Korea Development Institute cut its 2012 economic growth forecast to 2.5 percent yesterday, from a May projection of 3.6 percent.

“We will be seeing some correction in the currency market as investors take caution against government intervention and risk-taking recedes as stocks fall,” said Han Sung Min, a Seoul-based currency trader for Busan Bank. “Still, losses will be limited as dealers are waiting to sell the dollar once the won weakens to near the 1,120 level.”

The won weakened 0.2 percent to 1,118.40 per dollar at the close in Seoul, after reaching the strongest level since March yesterday, according to data compiled by Bloomberg. One-month implied volatility, a measure of exchange-rate swings used to price options, climbed five basis points, or 0.05 percentage point, to 6.22 percent. The Kospi index gained 0.1 percent.

European Union finance ministers failed to agree on a timetable for a more unified banking sector and clashed over terms of bailout requests and the role of the European Central Bank at a meeting Sept. 14 in Cyprus.

The yield on the government’s 3.25 percent bonds due June 2015 slid three basis points to 2.87 percent, Korea Exchange Inc. prices show. The rate touched 2.9 percent yesterday, the highest in almost a month. Three-year debt futures rose 0.13 to 106.00 and the one-year interest-rate swap fell three basis points to 2.92 percent.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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