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Korean Won Weakens, Bonds Gain as Investors Await ECB Meeting

South Korea’s won fell for a second day and government bonds gained as a slump in U.S. manufacturing deterred risk-taking ahead of a European Central Bank meeting to discuss a debt-purchase plan tomorrow.

The euro weakened even after ECB President Mario Draghi told lawmakers this week that the bank’s primary mandate compels it to intervene in bond markets to ensure the common currency’s survival. U.S. manufacturing shrank last month by the most since July 2009, a report showed yesterday. South Korea plans to announce economic stimulus measures next week without increasing the budget, Finance Minister Bahk Jae Wan said yesterday. The Kospi Index closed at the lowest level since Aug. 3.

“The euro declining before the ECB meeting and local share losses after U.S. manufacturing data are all contributing to risk-aversion sentiment in the market, weakening the won,” said Cho Young Bok, a Seoul-based currency trader for Daegu Bank.

The won slipped 0.2 percent to 1,135.85 per dollar at the close in Seoul, according to data compiled by Bloomberg. One-month implied volatility for the won, a measure of exchange-rate swings used to price options, jumped 25 basis points, or 0.25 percentage point, to 7.55 percent.

Bond Holdings

Overseas investors cut ownership of South Korea’s local-currency bonds by 2.6 trillion won ($2.3 billion) in August to 86.9 trillion won, the biggest monthly decline this year, the Financial Supervisory Service said in an e-mailed statement today.

South Korea’s foreign-exchange reserves rose $2.53 billion to a record $316.88 billion last month, the biggest increase in six months, according to central bank figures released today.

The yield on the government’s 3.5 percent bonds due March 2017 fell two basis points, or 0.02 percentage point, to 2.83 percent, Korea Exchange Inc. prices show. Three-year debt futures climbed 0.14 to 106.40 and the one-year interest-rate swap slid two basis points to 2.81 percent.

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