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Won Falls to One-Week Low on Fed Minutes, China Manufacturing

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Feb. 20 (Bloomberg) -- South Korea’s won fell to the lowest level in more than a week after a Federal Reserve report showed support for a plan to reduce stimulus and a private gauge signaled weaker Chinese manufacturing.

Several U.S. policy makers said that “in the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce” the pace of bond purchases, minutes of the Federal Open Market Committee’s Jan. 28-29 meeting showed yesterday. A purchasing managers index for China from HSBC Holdings Plc and Markit Economics fell to 48.3 for February, compared with the median estimate of 49.5 in a Bloomberg News survey. A reading below 50 signals contraction.

The won dropped 0.6 percent to 1,072.30 per dollar in Seoul, according to data compiled by Bloomberg. It touched 1,073.77 earlier, the weakest since Feb. 11. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 34 basis points to 7.43 percent.

“The Fed minutes drove the dollar-won exchange rate to above the 1,070 level as market opened,” said Yu Won Jun, a currency dealer at Korea Exchange Bank. “With the Chinese data worse than expected, there was some covering of short dollar positions and investors stuck with long bets.” A long position is a bet an asset will rise in value.

The Bank of Korea will face pressure to increase its benchmark interest rate as the Fed continues to taper it stimulus, Moody’s Investors Service analyst Tom Byrne told reporters in Seoul today. The central bank held borrowing costs at 2.5 percent at its Feb. 13 policy review.

The yield on the 3.25 percent government bonds due September 2018 was unchanged at 3.14 percent, after earlier rising to as much as 3.16 percent, according to Korea Exchange Inc. prices.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net

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