Korean Won Gains on Fitch Upgrade, ECB Plan; Bonds Fall

South Korean Won Gains on Fitch Upgrade, ECB Plan; Bonds Decline
The won strengthened 0.3 percent to 1.131.07 per dollar as of 10:21 a.m. in Seoul, according to data compiled by Bloomberg. Photographer: SeongJoon Cho/Bloomberg

Sept. 7 (Bloomberg) -- The won rose to a three-week high after Fitch Ratings upgraded South Korea and the European Central Bank stepped up efforts to tackle the euro region’s debt crisis. Government bonds fell as investors favored higher-yielding assets.

Fitch raised South Korea’s rating to AA-, one step above Japan and China, less than two weeks after a Moody’s Investors Service upgrade. ECB President Mario Draghi said yesterday unlimited debt purchases by the bank will help address “severe distortions” in sovereign bond markets that partly stem from unfounded fears about the euro. U.S. jobless claims fell last week and companies added more workers than forecast in August, reports showed yesterday. The Kospi index rallied 2.6 percent.

“The ECB’s announcement was more or less expected in the market, but combined with good U.S. economic data and Fitch’s rating upgrade in Korea, sentiment toward risk assets improved,” said Ryoo Hyun Jung, chief currency dealer at Citibank Korea Inc. in Seoul.

The won strengthened 0.3 percent to 1.130.40 per dollar at the close in Seoul, according to data compiled by Bloomberg. It touched 1,129.03 earlier, the strongest since Aug. 14, and gained 0.4 percent this week. One-month implied volatility, a measure of exchange-rate swings used to price options, slid 104 basis points, or 1.04 percentage point today, to 6.54 percent.

Fiscal Discipline

“The upgrade reflects Korea’s continued economic and financial stability in a volatile global environment,” Fitch said in yesterday’s statement. While Moody’s and Fitch now have South Korea on their fourth-highest ratings, Standard & Poor’s ranks the nation at A, its sixth-highest grade.

“It is an important vote of confidence for Korea’s safe-haven status, which could strengthen the appreciation bias of the Korean won,” said Wai Ho Leong, a senior regional economist at Barclays Plc in Singapore. “We expect more inflows from sovereign wealth funds.”

The yield on the government’s 3.25 percent bonds due June 2015 rose seven basis points, or 0.07 percentage point, to a two-week high of 2.82 percent, Korea Exchange Inc. prices show. South Korea’s three-year yield touched an all-time low of 2.74 percent on Sept. 5.

Three-year debt futures slid 0.24 today to 106.12 and the one-year interest-rate swap climbed seven basis points to 2.87 percent.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net