Won Slides to Eight-Month Low on North Korea Tensions

The won fluctuated near its lowest level in more than eight months as investors judged recent declines were excessive and foreign funds sold shares amid tensions with North Korea. Government bonds fell.

The dollar’s 14-day relative strength index against the South Korean currency rose above 70 for a third day, a threshold that signals the greenback may weaken, data compiled by Bloomberg show. The won touched 1,144.82 per dollar, the weakest since July 26, adding to a 4.3 percent decline in the past month after North Korea authorized its military to conduct a nuclear strike while restricting South Korean access to a jointly managed industrial zone. Overseas investors sold a net $3.5 billion of local stocks this year through yesterday.

“There is a market sentiment that the drop in the won in recent weeks was probably too much,” said Lee Dae Ho, analyst at Hyundai Futures Corp. in Seoul. “The North Korean factor has been priced in and investors have been feeling the burden from the level of the currency.”

The won was little changed at 1,140.26 per dollar as of 11:15 a.m. in Seoul, after climbing to 1,135.48 earlier, according to data compiled by Bloomberg. One-month implied volatility in the won, a measure of expected moves in the exchange rate used to price options, gained 18 basis points, or 0.18 percentage point, to 11.04 percent.

Stocks, Bonds

South Korea’s benchmark Kospi Index (KOSPI) of shares swung between gains and losses. The Bank of New York Mellon Korea ADR Index, which tracks American depositary receipts of South Korean companies in New York, lost 0.5 percent yesterday to 170.93, the lowest close since Sept. 6. The yield on the 2.75 percent government notes due March 2018 rose one basis point to 2.57 percent, according to prices from Korea Exchange Inc.

North Korea said yesterday it will suspend operations at the Gaeseong joint industrial complex and South Korea warned the North may be ready to conduct a nuclear test or a missile launch as early as this week.

“Combined with new concern of global outlook, regional tensions particularly remain high in Korea,” Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney, said by telephone today. “A significant weakness in the dollar- won isn’t likely to stop until North Korea tensions clear up. A lot of bad news has already been priced in Asian outlook.”

North Korea’s decision last week to restart production of weapons-grade plutonium is credit-negative for South Korea as it has increased “the chance of a serious military clash,” Moody’s Investors Service analysts David Erickson and Thomas Byrne wrote in a report yesterday.

Yen Moves

The won also tracked moves in the Japanese yen, which briefly erased a decline that sent it to the lowest level since May 2009 after Japanese Finance Minister Taro Aso said excessive currency gains are being corrected. The yen slid 6.5 percent in the previous three days after the Bank of Japan took unprecedented monetary easing steps, with a technical indicator signaling the drop may be poised to reverse.

A rapid weakening of the yen is expected to hurt the price competitiveness of South Korean exports, Bank of Korea said in a biannual report last week. The won strengthened 24 percent against the yen in the past six months.

“The won has been depreciating but the pace of depreciation is much faster with the yen,” South Korean Finance Minister Hyun Oh Seok said in Seoul yesterday. “The impact from this has not been so bad for South Korean exporters yet, but they will see their competitiveness worsening over time.”

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

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

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