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Won Extends Gain After Policy Rate Kept Unchanged; Bonds Decline

The won strengthened after South Korea’s central bank kept its benchmark interest rate unchanged and before a meeting of the Group of 20 nations at which leaders may express concern about competitive currency devaluations.

The South Korean currency rose for a third day to near a one-week high after the Bank of Korea kept the seven-day repurchase rate at 2.75 percent today, a move predicted by 14 of 15 economists in a Bloomberg News survey. The yen erased early gains and touched 93.64 per dollar after a former central bank official said it needed to weaken to help achieve the nation’s inflation target.

“The market is watching the dollar-yen moves and the BoK won’t cut unless the yen weakens to 95 per dollar,” Han Sung Min, a currency trader in Seoul at Busan Bank, said after the rate decision. “People are just waiting for the G-20 meeting to see if they will try to stop the yen weakness.”

The won gained 0.2 percent to 1,084.80 per dollar at 10:42 a.m. in Seoul, according to data compiled by Bloomberg. It earlier rose as high as 1,084.27, near the strongest level since Feb. 6. One-month implied volatility for the won, a measure of expected moves in exchange rates used to price options, fell 10 basis points, or 0.1 percentage point, to 7.55 percent.

Against the yen, the won was little changed at 11.60 per yen, according to data compiled by Bloomberg. It has rallied 17 percent against the Japanese currency in the past three months and reached 11.58 on Feb. 12, the strongest level since October 2008. A stronger won erodes the competitiveness of South Korean exporters such as Hyundai Motor Co. and Samsung Electronics Co.

Benchmark Rate

The Bank of Korea kept its benchmark interest rate on hold for a fourth month after the economy grew at an annual rate of 1.5 percent in the final quarter of 2012, trailing economists’ forecast for a 1.8 percent gain. Unemployment climbed to 3.2 percent last month versus 3 percent in December, the government said yesterday.

“Borrowing costs at the current level are accommodative, supporting the economy,” Lee Sung Kwon, an economist at Shinhan Investment Corp. in Seoul, said before the decision. “Still, policy makers may want a rate cut as early as next month if exports tumble on a weak yen.”

The won pared gains after a former Bank of Japan official Kazumasa Iwata said the yen needed to weaken to achieve the official inflation target of 2 percent. An exchange rate of 90 to 100 yen per dollar reflects a return to equilibrium, he said in Tokyo today.

Japan is punishing its trading partners by guiding the yen weaker, Eisuke Sakaibara, a former Ministry of Finance official said in an interview yesterday. That means the currency’s slump will be in the spotlight at the G-20 meeting in Moscow beginning tomorrow, he said.

Three-year government bonds dropped for a second day. The yield on South Korea’s 2.75 percent notes due December 2015 rose two basis points to 2.75 percent, Korea Exchange Inc. prices show.

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