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Won Drops Most in Week as BOK Flags Fed Risk; Bonds Fall

The won fell the most in a week and government bonds declined after the central bank governor flagged the possibility of the U.S. scaling back its debt-buying program that has fueled demand for emerging-market assets.

The world will face “interest-rate risks” due to rising bond yields if the U.S. exits from quantitative easing, Bank of Korea Governor Kim Choong Soo said in a speech today in Seoul. New York Federal Reserve President William C. Dudley said yesterday he hasn’t decided whether the next move should be to enlarge or shrink its $85 billion of monthly bond buying, while St. Louis Fed President James Bullard said the purchases should continue because economic growth is slower than expected. Fed Chairman Ben S. Bernanke is due to address Congress today.

The won fell 0.3 percent to 1,113.78 per dollar in Seoul, the biggest drop since May 15, according to data compiled by Bloomberg. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 16 basis points, or 0.16 percentage point, to 8.51 percent.

“Governor Kim showed a concern about an early exit of the Fed’s QE policies, and investors are nervous about that scenario,” said Choi Sung Hyun, a currency trader at Woori Bank in Seoul. “If Bernanke hints at the possibility of an early exit, the won may easily weaken below 1,120 won per dollar.”

The Bank of Korea lowered the benchmark seven-day repurchase rate to 2.5 percent from 2.75 percent on May 9. The decision by Governor Kim and his board to cut borrowing costs for the first time since October came as a weak yen dims the outlook for the country’s exports and record household debt weighs on consumption.

Debt Falls

South Korea’s short-term external debt fell to $122.2 billion at the end of the first quarter from $126.8 billion a year ago, according to a central bank statement today. Foreign ownership of Korean Treasuries and monetary-stabilization bonds was a record 17.8 percent of the total outstanding in April, Kwon Young Sun, a Hong Kong-based economist at Nomura Research Institute Ltd. (4307), wrote in a research note today.

The yield on South Korea’s 2.75 percent government bonds due March 2018 rose one basis point, or 0.01 percentage point, to 2.7 percent, according to prices from Korea Exchange Inc.

To contact the reporter on this story: Yewon Kang in Seoul at ykang51@bloomberg.net

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

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