The won had its biggest two-day loss in six months and government bonds rose as the new finance minister’s call for aggressive action to revive economic growth fueled speculation South Korea will cut interest rates.
The nation needs to act preemptively against economic risks, Finance Minister Choi Kyung Hwan said at his inauguration today. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major counterparts, advanced the most in two weeks yesterday as Federal Reserve Chair Janet Yellen said U.S. borrowing costs may rise sooner than expected if the labor market improves.
The won fell 1.3 percent from July 14 and 0.5 percent today to 1,031.98 per dollar at the close in Seoul, according to data compiled by Bloomberg. That’s the biggest two-day drop since Jan. 6. The benchmark 10-year sovereign bond yield declined four basis points to 3.03 percent, according to Korea Exchange Inc. prices. That’s the lowest for similar government debt since May 2013, the last time the Bank of Korea cut rates.
“Expectations for a stronger dollar and rate-cut speculation in Korea are sending the won lower,” said Son Eun Jeong, a Seoul-based currency analyst at Woori Futures Co. “Local exporters are also less active in selling dollars now.”
The government’s pro-growth stance could weigh against won appreciation expectations in the short term as a potential interest-rate reduction may be complemented by stepped-up intervention in the foreign-exchange market, Singapore-based Nomura Holdings Inc. analysts Craig Chan and Prateek Gupta wrote in a note yesterday. The won has advanced 8.3 percent in the past year, the most in Asia, dulling the competitiveness of the nation’s exporters.
“Investors are taking a rate cut for granted, and some are betting borrowing costs will be lowered twice,” said Moon Hong Cheol, a Seoul-based fixed-income analyst at Dongbu Securities Co. “Even the slightest negative comment about growth is accepted as a positive for the bond market at the moment.”
One-month implied volatility, a gauge of expected swings in the won’s exchange rate used to price options, climbed 25 basis points, or 0.25 percentage point, to 5.80 percent.