Won Rallies This Week as Fed Tempers Concern on Capital Outflows

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South Korea’s won posted the biggest weekly gain in two months after the Federal Reserve tempered concern that its monetary tightening will spur capital outflows by saying the pace will be gradual once it starts.

The currency rose to a three-week high Friday and government bonds climbed as the U.S. rate outlook bolstered risk appetite. South Korea will strengthen monitoring of global financial markets in the second half and act to preempt potential risks, Vice Finance Minister Joo Hyung Hwan said Thursday in Seoul, adding that the nation will be able to withstand any uncertainty arising from the Fed.

“Demand for the dollar weakened after the Fed meeting,” said Jeon Seung Ji, a Seoul-based currency analyst at Samsung Futures Inc. “Exporters’ dollar sales added upward pressure on the won, and there’ll be more to come next week.”

The currency rose 0.7 percent from June 12 and little changed Friday to close at 1,107.05 a dollar in Seoul, according to data compiled by Bloomberg. It climbed to 1,099.96 earlier, the highest level since May 26.

South Korea is also considering fiscal stimulus to support domestic consumption amid the outbreak of the Middle East Respiratory Syndrome, which has killed 24 people and put many more in quarantine. The allocation of a supplementary budget should be done quickly if needed, and its size would depend on the severity of the MERS impact, Finance Minister Choi told lawmakers on Monday.

Extra Budget

The government may allocate an extra 10 trillion won ($9 billion) to the budget to cushion the economic impact, the Maeil Business Newspaper reported on Friday, citing an unidentified government official.

The 10-year sovereign bond yield fell eight basis points Friday to 2.44 percent, Korea Exchange prices show. It rose eight basis points in the first three days of the week to 2.56 percent on speculation an increase in government spending would lead to more debt issuance.

“Long-term yields reversed gains from earlier in the week on speculation the size of the extra budget will be smaller than expected,” said Park Jong Youn, a Seoul-based fixed-income analyst for NH Investment & Securities Co. “That means less increase in supply.”

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