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Won Posts Biggest Monthly Gain This Year After Growth Quickens

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July 31 (Bloomberg) -- The won posted its biggest monthly gain this year after economic growth accelerated and concern a reduction in Federal Reserve stimulus was imminent eased. Government bonds declined.

Gross domestic product increased 2.3 percent in the second quarter from a year earlier, compared with 1.5 percent in the previous three months, official data showed July 25. Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co. won more than 3 trillion won ($2.7 billion) of drillship contracts this month. None of 54 economists surveyed by Bloomberg expect the Fed to begin paring asset purchases after its meeting ending today.

“South Korea’s fundamentals were shown solid with better-than-expected GDP and shipbuilders won many overseas deals,” said Hong Seok Chan, an analyst at Daishin Economy Research Institute in Seoul. “As long as the external risks remain weak, mainly the Fed tapering concern, demand for the won will have the upper hand.”

The won advanced 1.7 percent this month to 1,123.28 per dollar in Seoul, the biggest monthly gain since December 2012, according to data compiled by Bloomberg. The currency fell 0.8 percent today and weakened 5.2 percent in 2013. The won may strengthen to 1,090 by the end of this quarter and to 1,078 by year-end, Hong forecast.

Volatility, Bonds

“Offshore investors sought dollars today before the Federal Open Market Committee meeting ends,” said Jeon Seung Ji, a currency analyst at Samsung Futures Inc. in Seoul.

Half of the 54 economists polled by Bloomberg predicted a reduction of the Fed’s bond-buying program to $65 billion per month in September from $85 billion. South Korea must focus on reducing the impact on the country when the U.S. monetary authority tapers, a central bank board member said at the July 11 policy meeting, according to minutes released yesterday.

The won will probably remain vulnerable to portfolio outflows given the large amount of foreign ownership of bonds and stocks, Nomura Holdings Inc. analysts including Craig Chan, a strategist in Singapore, wrote in a research note today.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped 3.09 percentage points to 8.3 percent in July. It climbed 40 basis points, or 0.4 percentage point, today.

South Korea’s current-account surplus was at $7.24 billion last month after a record $8.64 billion in May, the Bank of Korea said yesterday.

The yield on the 2.75 percent government bonds due June 2016 rose six basis points this month to 2.94 percent, according to Korea Exchange Inc. prices. The yield increased three basis points today.

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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