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Korean Won Rises to 15-Month High on Fed Stimulus; Bonds Decline

South Korea’s won strengthened to a 15-month high after the Federal Reserve said it will expand asset purchases that boost the supply of dollars. Government bonds fell.

The Fed said yesterday it will buy $45 billion a month of Treasury securities starting in January, in addition to $40 billion a month of existing mortgage-debt purchases. The won held its gains after the Bank of Korea kept the benchmark interest rate unchanged at 2.75 percent in a decision predicted by 14 of 15 economists surveyed by Bloomberg News. Vice Finance Minister Shin Je Yoon said the impact on financial markets from yesterday’s rocket launch by North Korea was “limited” and “temporary.”

The won rose for a fifth day, the longest run of gains since October, and closed 0.2 percent stronger at 1,073.03 per dollar in Seoul, according to data compiled by Bloomberg. The currency touched 1,071.08 earlier, the strongest level since Sept. 8, 2011. One-month implied volatility, a measure of expected moves in exchange rates used to price options, slid 20 basis points, or 0.20 percentage point, to 4.75 percent. The Kospi index of shares rallied 1.4 percent.

“It’s the Fed’s announcement that’s dominating market today, with the BOK’s rate decision having little effect as it was expected,” said Jeon Seung Ji, a Seoul-based currency analyst for Samsung Futures Inc. “There is speculation the government will prevent the won from appreciating beyond the 1,070 per dollar level, which will limit steeper gains.”

Herd Behavior

South Korea is concerned about herd behavior in won trading and a worsening of the exchange-rate trend will be the most important factor in making any decision regarding a tightening of restrictions on capital flows, Vice Finance Minister Shin said Dec. 11.

Asia’s fourth-largest economy is poised for a “moderate” export-led recovery and inflation will remain low, the central said in a statement today. The interest-rate decision was unanimous, Governor Kim Choong Soo said at a press briefing.

Government bonds extended declines after the central bank’s policy announcement. The yield on South Korea’s 2.75 percent bonds due September 2017 increased three basis points to 2.99 percent, Korea Exchange Inc. prices show. The one-year interest-rate swap rose three basis points to 2.81 percent.

“Some traders had expected the central bank to make dovish comments,” said Ahn Soo Jin, a fixed-income trader in Seoul at Busan Bank. “But with nothing special coming out of today’s policy meeting, it appears that they sold the bonds out of disappointment.”

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