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Korean Won Completes Biggest Monthly Drop Since May; Bonds Gain

South Korea’s won completed its biggest monthly drop since May as increased risk of conflict with North Korea and a worsening economic outlook prompted global funds to cut their holdings of the nation’s shares.

Overseas investors sold $2 billion more Korean stocks than they bought this month and the government yesterday lowered its 2013 economic growth forecast to 2.3 percent from a December projection of 3 percent. Tensions have risen on the peninsula since North Korea detonated a nuclear device in February and the communist state says military drills being conducted by the U.S. and South Korea have brought the region to the brink of war. Government bonds rose this month as Cyprus became the fifth euro-area member to seek a bailout.

“Rising concerns stemming from North Korea’s threats and uncertainty created by a bank bailout in Cyprus kept investors away from riskier assets,” said Hong Seok Chan, an analyst at Daishin Economic Research Institute in Seoul. “Still, dollar sales by exporters toward the end of the month and the quarter kept the won from falling further.”

The currency declined 2.6 percent this month against the greenback, according to data compiled by Bloomberg. The won was 0.2 percent stronger today at 1,111.35 per dollar in Seoul. One- month implied volatility in the currency, a measure of expected moves in the exchange rate used to price options, dropped 16 basis points from yesterday to 7.5 percent, according to data compiled by Bloomberg.

Falling Output

South Korea’s industrial production unexpectedly fell for a second month in February, declining 0.8 percent from January when it shrank 1.2 percent, government data showed today. The median forecast in a Bloomberg survey was for 0.3 percent growth. From a year earlier, output slumped 9.3 percent, the biggest drop since March 2009.

A central bank report today showed an index measuring manufacturers’ expectations for April climbed to 80, the highest level since July. The economy expanded 1.5 percent in the final quarter of 2012, the slowest pace in three years, Bank of Korea figures showed earlier this week.

“The won has been sliding because of the problems in Europe and North Korea and as dollar sales increased,” said Son Eun Jeong, an analyst at Woori Futures Co. in Seoul. “The strong dollar trend will continue in April as the high debt of euro-zone countries still endangers regional stability.”

The yield on the South Korean government’s 2.75 percent bonds due December 2015 dropped 12 basis points, or 0.12 percentage point, this month to 2.51 percent, according to prices from Korea Exchange Inc. It rose four basis points today, rebounding from a record low.

The government said yesterday it will unveil a stimulus package in April to spur the property market and revive the economy after cutting its growth forecast for the second time in four months.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net

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

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