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Won Rises to 15-Month High on Fed, U.S. Budget Optimism

South Korea’s won strengthened to a 15-month high as bets the Federal Reserve may add to monetary stimulus and U.S. lawmakers will make progress in budget talks increased demand for riskier assets.

The Dollar Index fell before the U.S. Federal Open Market Committee begins its last meeting of the year today. President Barack Obama extended an offer of cooperation with Republicans yesterday over the so-called fiscal cliff of tax increases and spending cuts that kick in next year, saying he’s ready to make a deal. South Korea is concerned about herd behavior in won trading and worsening of “one direction” will be the most important factor in making decision on tightening of capital flow management, Vice Finance Minister Shin Je Yoon said today.

“The won is facing continuous appreciation pressure as there is increased appetite for riskier assets amid the Fed meeting and expectations the fiscal cliff will be avoided,” said Kim Dong Young, a Seoul-based currency trader for Industrial Bank of Korea. “Government intervention, even if it happens, will have limited effect on curbing gains.”

The won rose for a third day, appreciating 0.2 percent to 1,076.68 per dollar at the close in Seoul, according to data compiled by Bloomberg. The currency touched 1,076.53 earlier, the strongest level since Sept. 9, 2011. One-month implied volatility, a measure of expected moves in exchange rates used to price options, rose nine basis points, or 0.09 percentage point, to 4.80 percent. The Kospi index of shares gained 0.4 percent, while government bonds were steady.

South Korea may impose daily limits on banks’ currency forward holdings instead of the current monthly curbs, Deputy Finance Minister Choi Jong Ku said yesterday. The U.S. faces a $607 billion combination of tax increases and spending cuts due to take effect in January which threatens to derail a recovery in the world’s largest economy.

The yield on South Korea’s 2.75 percent bonds due September 2017 was steady at 2.96 percent, Korea Exchange Inc. prices show. The one-year interest-rate swap declined one basis point to 2.79 percent.

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