Korean Won Rises to 7-Week High, Bonds Drop on Europe

South Korea’s won jumped to a seven-week high and government bonds fell as European leaders made progress in aiding the region’s indebted countries, increasing demand for riskier assets.

The won weakened earlier after the finance ministry cut its economic growth forecast to 3.3 percent this year, less than a December estimate of 3.7 percent, according to a statement yesterday after markets closed. The euro rose the most since October and the Kospi Index rallied as euro-area leaders agreed to drop their claims as preferred creditors for emergency loans to Spanish banks and relax conditions on possible help for Italy.

“The euro jumping on reports from Europe and South Korean exporters selling the dollar triggered investors to stop their long positions on the dollar,” said Kim Do Hee, a Seoul-based currency trader at Australia & New Zealand Banking Group Ltd. A long position is a bet an asset will gain in value.

The won strengthened 0.8 percent to 1,145.40 per dollar at the close in Seoul, after weakening by as much as 0.3 percent, according to data compiled by Bloomberg. It touched 1,144.96 earlier, the strongest since May 11. The currency gained 1 percent since June 22, posting a fifth weekly gain. It has strengthened 3 percent this month, paring its quarterly drop to 1.1 percent.

The currency’s one-month implied volatility, a measure of exchange-rate swings used to price options, dropped 31 basis points, or 0.31 percentage point, to 7.57 percent.

‘Yields May Rise’

South Korea’s industrial output rose 1.1 percent in May from the previous month, beating the median estimate in a Bloomberg News survey for a 0.3 percent gain, data showed today.

The yield on the government’s 3.5 percent bonds due March 2017 rose four basis points to 3.42 percent, Korea Exchange Inc. prices show. The rate has dropped 25 basis points this quarter. Three-year debt futures fell 0.14 to 104.68 and the one-year interest-rate swap advanced two basis points to 3.34 percent.

“We saw overseas investors and foreign banks selling South Korean bond futures after reports from Europe,” said Lee Seung Hoon, a Seoul-based fixed-income analyst at Samsung Futures Inc. “Bond yields may rise for some time if we see more progress from the Europe summit.”

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