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Won Trades Near 6-Month Low Amid Europe Debt Woes; Bonds Gain

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March 21 (Bloomberg) -- South Korea’s won traded near a six-month low as concern that Europe’s debt crisis will escalate was countered by the Federal Reserve signaling its record bond-buying program will continue. Government bonds rose.

The Standard & Poor’s 500 Index snapped a three-day decline as Fed Chairman Ben S. Bernanke said the U.S. labor market must improve further for the central bank to consider reducing its record monetary easing. The won declined yesterday after South Korea said it will consider curbing capital flows, and Cypriot lawmakers rejected an unprecedented levy on bank deposits. The European Central Bank will probably delay a decision on continued support for Cyprus’s banks, two people familiar with the deliberations said yesterday.

“Ongoing European debt concerns from Cyprus and worries about possible government steps to stem capital flows are likely to” prevent the won from strengthening, said Hong Seok Chan, an analyst at Daishin Economic Research Institute in Seoul. “Investors are somewhat relieved that the U.S. won’t be tightening policy yet.”

The won closed at 1,115.97 per dollar in Seoul, compared with 1,116.30 yesterday, according to data compiled by Bloomberg. It touched 1,119.95 yesterday, the weakest since Sept. 27. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 28 basis points, or 0.28 percentage point, to 8.62 percent.

Financial Taxes

Eun Sung Soo, director general at the finance ministry, told reporters yesterday that both new measures and tightening of existing ones will be considered to curb capital flows. Policy makers will consider “various” financial taxes if needed and closely monitor foreign-currency debt, he said.

The Kospi Index of shares fell after a network shutdown caused by a cyberattack triggered its biggest drop yesterday in two months. Hackers temporarily shut down computer networks at South Korean broadcasters and banks yesterday in the biggest cyberattack on the nation in two years, prompting a probe into possible links with North Korea.

North Korea’s state-run radio issued an air-raid alert around 9:32 a.m. local time today, Yonhap News reported, citing the North’s state media. The alert was lifted at 10:29 a.m. and may have been part of a drill, it said.

“Geopolitical risks have emerged,” after the North’s air-strike alert, said Lee Dae Ho, an analyst at Hyundai Futures Corp. in Seoul. “While concerns about Cyprus are still lingering, the Fed’s stance that it will continue its stimulus program is likely to limit further declines in the won.”

The yield on South Korea’s 2.75 percent bonds due December 2015 dropped one basis point 2.59 percent, according to prices from Korea Exchange Inc.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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