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Korean Won Falls as Europe Debt Jitters Spur Demand for Dollars

South Korea’s won fell to the lowest level this week as concern European leaders will fail to resolve a regional debt crisis spurred demand for the relative safety of the dollar. Government bonds fell.

European leaders will hold summits on Oct. 23 and Oct. 26 to try and break a deadlock between Germany and France over how best to restore confidence in the region’s sovereign debt and banks. Governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis, combining the European Union’s temporary and planned permanent rescue funds, according to two people familiar with the discussions.

“Uncertainties over Europe’s debt crisis will cause the won to fluctuate,” said Lee Jung Ha, a senior currency trader in Seoul at the Korea Development Bank. “Still, it looks like the won will slowly continue its appreciation trend as overseas financial markets show signs of stabilizing.”

The won fell 0.2 percent to 1,147.50 per dollar in Seoul, after sliding 1.1 percent yesterday, according to data compiled by Bloomberg. The currency advanced 0.8 percent this week, supported by an agreement between South Korea and Japan to expand a currency-swap accord to $70 billion.

South Korean Finance Minister Bahk Jae Wan told lawmakers today liquidity driven by global monetary easing pushed up domestic prices and that it is “not easy” to keep inflation below the government’s target ceiling of 4 percent for this year. The finance ministry should try to reduce liquidity in coordination with the Bank of Korea, Bahk said, according to an Infomax report.

The government’s benchmark three-year bonds fell for the first time in four days, pushing yields up to the highest level in three weeks. The yield on South Korea’s 3.5 percent bonds due June 2014 jumped eight basis points, or 0.08 percentage point, to 3.51 percent, Korea Exchange Inc. prices show. The rate jumped 12 basis points this week, the biggest weekly gain since the note began trading in June.

“It seems market players interpreted the finance minister’s comments on reducing liquidity as a sign the government will not consider cutting interest rates,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul. “Share gains also led to selling of bonds.” The Kospi Index of shares rose 1.8 percent today.

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