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Korean Won Rises to 15-Month High Offshore as Inflation Eases

South Korea’s won advanced to a 15-month high in offshore trading on speculation lower inflation will give the central bank room to cut interest rates and support a recovery in Asia’s fourth-largest economy.

The currency appreciated to above 1,070 per dollar for the first time since September 2011 today, while the onshore market was shut. Inflation slowed to 1.4 percent in December from 1.6 percent in November, Statistics Korea said today. Data last week showed industrial output expanded 2.3 percent from the previous month, the biggest gain since January. Overseas funds bought $3.3 billion more Korean shares than they sold this month through Dec. 28, exchange data show.

“As inflation eases, there’s room for Bank of Korea to cut interest rates further to stimulate the economy,” said Frances Cheung, a Hong Kong-based strategist at Credit Agricole CIB. “We expect inflows into South Korea’s markets will continue next year.”

The won rose 0.6 percent to 1,064.40 per dollar as of 2:35 p.m. in Hong Kong, according to data compiled by Bloomberg, the strongest since Sept. 2, 2011. Local financial markets are closed today and tomorrow, and will open an hour later than usual on Jan. 2. One-month forwards on won advanced 0.3 percent today to 1,067.03, after a 0.7 percent rally last week.

The Bank of Korea cut interest rates twice this year to support expansion and will next decide borrowing costs on Jan. 11. The finance ministry has cut its 2013 growth forecast to 3 percent, from a September projection of 4 percent, and lowered its estimate for expansion this year to 2.1 percent from 3.3 percent.

One-month implied volatility, a measure of expected moves in exchange rates used to price options, dropped 10 basis points today to 4.83 percent. It was 13.55 percent at the end of 2011.

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