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Korea Won Drops as Recovery Woes Overshadow Growth Forecasts

July 12 (Bloomberg) -- South Korea’s won fell for the first time in three days on signs the global recovery may not last, overshadowing investor optimism spurred by the Bank of Korea’s revision to the country’s economic outlook.

The central bank today raised its 2010 growth forecast to 5.9 percent, from an April projection of 5.2 percent, and China may say this week that its expansion in the April-to-June period topped 10 percent for a third straight quarter, according to a Bloomberg News survey of economists’ estimates. The euro fell for a second day as European finance ministers meet in Brussels, where they will debate how much of regional banks’ stress tests should be disclosed.

“Europe’s troubles are not over and China’s growth could be peaking out,” said Thio Chin Loo, a senior currency analyst at BNP Paribas SA in Singapore. “Markets remain cautious and they’re not expecting the bullish mood to extend too far.”

The won dropped 0.5 percent to 1,201.86 per dollar as of the 3 p.m. close in Seoul, from 1,195.85 at the end of last week, according to data compiled by Bloomberg. It’s strengthened 3.7 percent in the past month, the biggest gain among Asia’s 10 most-used currencies, and today reached 1,193.75, the strongest level since June 24.

The Bank of Korea, which last week lifted its benchmark interest rate by 25 basis points from a record-low 2 percent, increased its exports estimate to 26.4 percent from 18.6 percent and doubled its prediction for this year’s current-account surplus to $21 billion. Bond yields rose to a four-month high on concern the central bank will further tighten monetary policy this year.

Bonds Fall

“Fundamentals are really strong and that’s a positive,” said Hur Sang Hoon, a currency analyst at Korea Exchange Bank. “That’s led to higher interest rates, which will attract capital flows looking to take advantage of higher yields.” Hur expects the won to strengthen to 1,150 against the dollar this week. The won is still down 3.3 percent for the year, Asia’s worst performance.

The yield on South Korea’s 3.75 percent bond due June 2013 climbed to 3.96 percent. A basis point is 0.01 percentage point.

International Monetary Fund Managing Director Dominique Strauss-Kahn said in Seoul today that the Bank of Korea’s interest-rate increase last week reflected strong economic growth, with the nation’s actual output fast approaching its potential level.

Rate Increases

The government on June 24 boosted its 2010 growth forecast for South Korea to 5.8 percent from a December projection of 5 percent, saying the global recovery has spurred exports and local demand.

“Today’s upward revisions in Korea’s economy is pushing bonds lower because that’s raising the possibility of more rate hikes,” said Peter Park, a fixed-income analyst at Woori Investment & Securities in Seoul. Park expects the Bank of Korea to tighten policy by as much as 50 basis points by the end of the year.

Higher borrowing costs will make investors “less enthusiastic” about buying South Korean government bonds, Park said.

Investors bid to buy 4.63 trillion won ($3.8 billion) of five-year treasuries at an auction today, or 2.89 times the amount on offer, the Ministry of Economy and Finance said. That’s the smallest amount of bids since March. South Korea sold 1.82 trillion won of notes to yield 4.54 percent, the ministry said.

To contact the reporters on this story: Frances Yoon in Seoul at fyoon2@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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