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South Korea’s Won Strengthens as Exports Increase; Bonds Fall

South Korea’s won climbed the most in more than two months on optimism the nation’s economic recovery is on track after exports increased for a 10th consecutive month in August. Bonds fell.

Government data showed overseas shipments, which account for about half of gross domestic product, increased 29.6 percent from a year earlier after gaining a revised 28.3 percent the previous month. The Economy Ministry today forecast a trade surplus of $32 billion for 2010, compared with a previous estimate of $20 billion. Overseas investors have pumped $7.1 billion into South Korean shares so far this year, with the benchmark index advancing 4.9 percent.

“Growth in exports is high and the Korean stock market is strong,” said Peter Park, a fixed-income analyst at Woori Investment & Securities in Seoul. “It drives appreciation pressure on the won.”

The won strengthened 1.2 percent, the most since June 21, to 1,184.78 per dollar as of the 3 p.m. close in Seoul, according to data compiled by Bloomberg. It earlier reached 1,184.70, the strongest level since Aug. 23. The currency may strengthen to 1,101 by the end of the year, Park said.

Government bonds slid on concern that rising inflation may spur the central bank to raise interest rates. Consumer prices rose 2.6 percent in August from a year earlier, the same pace of gain as in July, the statistics office said today. The figure matched the median estimate of economists surveyed by Bloomberg News. Prices rose 0.3 percent from July.

“We believe that pre-empting inflation expectations arising from demand-pull pressures will remain the Bank of Korea’s main priority,” Wai Ho Leong, a Singapore-based regional economist at Barclays Plc, wrote in a note today. “We maintain our view that the policy rate may be raised by another twenty-five basis points at the September meeting.”

The yield on the 5 percent note due in June 2020 climbed one basis point to 4.40 percent, according to prices from the Korea Stock Exchange. A basis point is 0.01 percentage point. The yield on benchmark three-year bonds climbed four basis points to 3.60 percent.

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