Won Drops to Two-Week Low Before Fed Meeting Amid Iraq Conflict

South Korea’s won declined to the lowest in almost two weeks as investors weighed violence in Iraq and the outlook for U.S. monetary policy.

The currency fell for a fourth day as Iraq’s army pummeled the positions of Sunni Muslim insurgents who have captured large chunks of territory in the country’s north as the U.S. considered a military intervention to help the government. The Bloomberg JPMorgan-Asia Dollar Index (ADXY), which tracks the region’s 10 most-used currencies against the greenback, fell before the Federal Reserve starts a two-day policy meeting today.

“The conflict in Iraq is affecting global markets,” said Moon Keon Hwa, a Seoul-based currency trader for Suhyup Bank. “The won will face weakening pressure as Korea can’t be an exception.”

The won dropped 0.2 percent to 1,021.80 per dollar at the close in Seoul, data compiled by Bloomberg show. It touched 1,023.25 earlier, the weakest level since June 5. The currency has strengthened more than 10 percent in the past year and reached 1,015.25 on June 10, the highest since August 2008.

“There seems to have been some unwinding of positions betting for a stronger won as Asian currencies weakened,” said Kim Dong Wook, a Seoul-based currency trader for Kookmin Bank. “It seems like a technical movement, not a change in trend.”

One-month implied volatility in the won, a gauge of expected moves in the exchange rate used to price options, rose five basis points, or 0.05 percentage point, to 4.96 percent.

The International Monetary Fund cut its U.S. economic growth forecast to 2 percent from 2.8 percent yesterday, saying the Fed may have scope to keep interest rates at zero for longer.

The yield on the 2.75 percent bonds due June 2017 advanced one basis point to 2.73 percent in Seoul, Korea Exchange prices show. The 10-year yield fell one basis point to 3.31 percent.

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

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Amit Prakash, Anil Varma

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