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Won Drops Most in Three Months as Yen Breaches 101; Bonds Fall

May 10 (Bloomberg) -- The won dropped the most in three months on speculation South Korean authorities will favor depreciation to support exporters as the yen’s decline makes Japanese rivals more competitive. Government bonds declined.

The yen slid to 101 per dollar for the first time in four years, extending declines spurred by the Bank of Japan’s stimulus measures to fight deflation. BOJ’s aggressive monetary easing has a big impact on South Korea, Bank of Korea Governor Kim Choong Soo said at a briefing yesterday after the central bank unexpectedly cut its benchmark seven-day repurchase rate by a quarter percentage point to 2.5 percent.

The won fell 1.4 percent to 1,106.39 per dollar in Seoul, the biggest drop since Jan. 28, according to data compiled by Bloomberg. It dropped 0.8 percent this week. One-month implied volatility in the won, a measure of expected moves in the exchange rate used to price options, rose 108 basis points, or 1.08 percentage points, today and 69 basis points this week to 7.68 percent, the data show.

“As the yen continues to fall after breaching the 100 level, overseas investors are shedding emerging-market assets and buying the dollar,” said Park Hyun, a currency trader at Woori Bank Co. in Seoul. “Although it’s still uncertain about the intervention by the government, Governor Kim’s comment about the weak yen’s impact on South Korea made traders nervous.”

The won has strengthened 13 percent against the yen this year and weakened 3.8 percent against the dollar. That makes it harder for exporters such as Samsung Electronics Co. and Hyundai Motor Co. to compete against Japanese rivals overseas.

Financial Support

The government said on May 1 it will add 11.1 trillion won ($10 billion) of financial support this year for companies, including small- to medium-sized exporters, grappling with the sliding yen. The drop in the Japanese currency is a concern as it threatens market stability, Governor Kim said yesterday.

The yield on South Korea’s 2.75 percent government bonds due March 2018 rose one basis point today and 11 basis points this week to 2.63 percent, according to prices from Korea Exchange Inc.

To contact the reporter on this story: Yewon Kang in Seoul at ykang51@bloomberg.net

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

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