Korean Won Set for Third Weekly Drop on Fed Stimulus Concern

South Korea’s won headed for a third weekly drop and government bonds fell on concern the Federal Reserve will scale back monetary stimulus that has fueled rallies in emerging-market assets.

The currency was poised for its longest losing streak in two months after Federal Reserve Chairman Ben S. Bernanke said May 22 the central bank may taper its $85 billion a month of bond-buying, known as quantitative easing, if it’s confident of sustained improvement in the U.S. economy. Bank of Korea Governor Kim Choong Soo said today a possible U.S. exit from its stimulus program would cause volatility in other nations.

The won dropped 1 percent this week to 1,127.82 per dollar as of 10 a.m. in Seoul, according to data compiled by Bloomberg. The run of three weekly declines is the longest since the period ending March 22. The currency rose 0.1 percent today after dropping 1.3 yesterday, the biggest decline since May 10.

“Investors prefer to hold safer assets after Bernanke’s comments on the QE exit plan,” said Son Eun Jeong, an analyst at Woori Futures Co. in Seoul.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose four basis points this week and fell 36 basis points today to 9.2 percent, data compiled by Bloomberg show.

Any move to reduce the pace of the bond-buying could be followed by an increase should the economy weaken again, Federal Reserve Bank of San Francisco President John Williams said in a May 22 interview.

Chinese Manufacturing

Foreign funds sold more Korean equities than they bought for a second day after a Chinese Purchasing Managers’ Index for manufacturing fell to 49.6 in May, according to preliminary data from HSBC Holdings Plc and Markit Economics released yesterday. That compares with the 50.4 median estimate in a Bloomberg News survey. Fifty is the dividing line between expansion and contraction.

The yield on South Korea’s 2.75 percent government bonds due March 2018 rose eight basis points this week to 2.73 percent, according to prices from Korea Exchange Inc. The rate increased two basis points, or 0.02 percentage point, today.

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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