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Won Weakens on Concern Fed Will Refrain From Extending Stimulus

The won snapped a two-day rally and dropped the most in three weeks on speculation the Federal Reserve will refrain from extending monetary easing in the U.S., South Korea’s second-biggest export market.

The minutes of the Federal Open Market Committee’s Jan. 29-30 meeting showed policy makers were divided about the strategy behind Chairman Ben S. Bernanke’s program of buying bonds until there is “substantial” improvement in the U.S. labor market burdened with 7.9 percent unemployment. South Korea’s incoming President Park Geun Hye said yesterday currency stability is important.

“Investors are concerned the U.S. may end its stimulus program and that may dry up the supply of dollars as foreign investors pull money away from emerging markets,” said Hong Seok Chan, an analyst at Daishin Economic Research Institute in Seoul. “The won also fell after South Korea’s president-elect said currency stability is important for exporters.”

The won dropped 0.7 percent to close at 1,086.24 per dollar in Seoul, posting the biggest drop since Feb. 1, according to data compiled by Bloomberg. One-month implied volatility for the won, a measure of expected moves in the exchange rate used to price options, climbed 54 basis points, or 0.54 percentage point, to 7.29 percent, data compiled by Bloomberg show.

Currency Rules

Incoming President Park said yesterday currency stability is needed to protect South Korean companies and the nation will “pre-emptively, effectively” respond to the foreign-exchange risk, according to an e-mailed statement from her spokesman Park Sun Kyoo. The incoming government may adjust currency trading rules if needed, Park’s transition team said in a policy report today. The won gained 1.6 percent last week, the biggest five-day advance since the period ended Dec. 2, 2011. China is South Korea’s biggest export market.

The yield on South Korea’s 2.75 percent government bonds due 2017 fell three basis points, or 0.03 percentage point, to 2.79 percent, Korea Exchange Inc. prices show.

Bank of Korea Governor Kim Choong Soo said in an interview this week an improved global outlook boosts the odds of 2013 economic growth exceeding forecasts, signaling further monetary easing isn’t needed for now. The central bank kept the benchmark seven-day repurchase rate at 2.75 percent on Feb. 14 after cuts of 25 basis points each in July and October.

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