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Won Approaches 4-Month High as Germany Backs ECB; Bonds Steady

South Korea’s traded near a four-month high after Germany’s support of a European bond-buying plan eased concern the region’s debt crisis will drive international investors out of Asia’s fourth-biggest economy.

The won closed at 1,128.78 per dollar, compared with 1,129.23 yesterday, data compiled by Bloomberg show. The currency touched 1,124.00 yesterday, the strongest level since April 3. The yield on the government’s 3.5 percent bonds due March 2017 held at 2.87 percent, Korea Exchange Inc. prices show.

German Chancellor Angel Merkel’s support of the European Central Bank’s plan may help ease the crisis in a region that Korean exporters rely on for 9 percent of sales. Overseas investors boosted their holdings of the Asian nation’s debt by 1.4 trillion won ($1.2 billion) to a record 89.7 trillion won last month, the Financial Supervisory Service said in a statement on Aug. 3.

“The progress we see in Europe is easing concern that foreign investors may pull funds from Korea, supporting the won,” said Byeon Ji Young, a Seoul-based currency analyst at Woori Futures Co.

South Korea’s Finance Ministry said in its monthly report today that the European debt crisis, a slowdown in major economies and weak domestic consumer sentiment are major concerns. The central bank lowered its growth forecast for this year to 3 percent last month from a 3.5 percent prediction made in April.

BOK Meeting

Ten of 16 economists surveyed by Bloomberg say the Bank of Korea will leave its benchmark interest rate unchanged at 3 percent at a policy meeting on Aug. 9 after unexpectedly cutting it last month. Six forecast a 25 basis point reduction.

“The central bank’s rate decision will have little effect on the won if the rate is kept on hold, but may weaken the currency if borrowing costs are lowered again as the decision signals a negative outlook on the economy,” Byeon said.

One-month implied volatility for the won, a measure of exchange-rate swings used to price options, fell ten basis points, or 0.10 percentage point, to 7.18 percent.

Three-year debt futures climbed 0.02 to 106.26 and the one-year interest-rate swap advanced one basis point to 2.82 percent.

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