South Korea’s Won Drops on Fed Taper, China Manufacturing PMI

The won weakened after the Federal Reserve reduced U.S. stimulus that has driven gains in emerging markets and as data in South Korea and China signaled slower economic expansion.

The Fed said Jan. 29 it will its cut monthly bond purchases by $10 billion to $65 billion, citing improvements in labor-market indicators and growth. South Korea’s exports unexpectedly shrank last month and a manufacturing gauge in China, the biggest overseas market for Korean goods, fell to a six-month low, official data showed Feb. 1.

The won weakened 1.3 percent from Jan. 29 to 1,084.45 per dollar at the close in Seoul, according to prices from local banks compiled by Bloomberg. South Korea’s financial markets were closed Jan. 30-31 for the Lunar New Year holiday.

“The won is facing continued weakening pressure from the Fed’s tapering and Chinese data,” said Jude Noh, chief currency trader at Suhyup Bank in Seoul.

China’s Purchasing Managers’ Index for manufacturing fell to a six-month low of 50.5 in January. Fifty is the dividing line between expansion and contraction. South Korea’s exports shrank 0.2 percent last month from a year earlier, compared with a 7 percent expansion in December and the median estimate for a 1.5 percent gain in a Bloomberg News survey.

One-month implied volatility in the won, a gauge of expected moves in the exchange rate used to price options, rose 45 basis points, or 0.45 percentage point, from Jan. 31 to 8.41 percent.

Dollar Demand

“Dollar demand was strong from overseas investors and some local exporters were selling the greenback as the won weakened,” said Yun Se Min, a currency dealer at Busan bank.

South Korea’s Financial Services Commission said in a Jan. 30 statement it will further strengthen monitoring of global and local markets, taking appropriate steps when necessary in close collaboration with related government agencies.

The yield on South Korea’s 3 percent government bonds due December 2016 was unchanged at 2.88 percent, according to Korea Exchange Inc. prices. Five-year rates fell two basis points to 3.22 percent.

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