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Won Weakens, Bonds Gain on U.S. Budget Deadlock Concerns

South Korea’s won weakened for the first time in three days and government bonds rose as concern that U.S. lawmakers are struggling to reach a budget agreement damped investor appetite for riskier assets.

U.S. stocks fell yesterday as Senate Majority Leader Harry Reid said Democrats and Republicans have made little progress in avoiding the so-called fiscal cliff of $607 billion of automatic spending cuts and tax increases. South Korea had a current-account surplus for a ninth straight month in October, central bank figures showed today. The excess was $5.8 billion, compared with $5.9 billion in September. The government yesterday tightened limits on the amount of currency forward positions banks are allowed to hold.

“The decline in U.S. equities as the fiscal cliff looms is preventing further gains in the won,” said Lee Jin Ill, a Seoul-based currency trader for Hana Bank. “The effect of yesterday’s regulation in forward positions is over for now, unless additional curbs are announced soon.”

The won weakened 0.2 percent to 1,086.43 per dollar at the close in Seoul, according to data compiled by Bloomberg. One-month implied volatility, a measure of expected moves in exchange rates used to price options, declined 15 basis points, or 0.15 percentage point, to 5.20 percent. The Kospi Index of shares fell 0.7 percent.

The U.S. Treasury Department said it will “continue to press” South Korea to limit foreign-exchange interventions to “the exceptional circumstances of disorderly market conditions,” according to a statement accompanying its semi-annual currency report to Congress yesterday.

The yield on the government’s 2.75 percent notes due September 2017 dropped two basis points to 2.90 percent in Seoul, Korea Exchange Inc. prices show. The one-year interest-rate swap fell two basis points to 2.78 percent.

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