The won declined along with bonds on prospects global funds will pull more money from the nation’s assets as the U.S. edges closer to raising interest rates, just as South Korea’s economy is slowing.
The won is leading a three-month loss among Asia currencies and Bank of Korea data Wednesday showed foreign-exchange reserves fell 1 percent to $370.8 billion in July. A dollar gauge rose to its highest level since March after a voting member of the U.S. Federal Open Market Committee said September may be appropriate for a rate increase.
Korea’s currency dropped 0.7 percent to close at 1,173.56 a dollar in Seoul, according to data compiled by Bloomberg. It has lost 7.8 percent in three months.
“Dollar-buying sentiment revived,” said Jahng Won, a foreign-exchange trader at Shinhan Bank in Seoul. “The won is likely to trade around the 1,170 level this week as most traders think the currency’s drop was rather fast recently.”
Federal Reserve Bank of Atlanta President Dennis Lockhart said in an interview with the Wall Street Journal that it would take a significant deterioration in economic data to put off a September rate hike. The Bloomberg Dollar Spot Index has climbed 0.7 percent in three days after rising 2.3 percent in July.
The drop in foreign-exchange reserves is due to the U.S. dollar’s strength, which reduced the value of holdings of other currencies when converted, Bank of Korea said in an e-mailed statement. Still, Daishin Economic Research Institute says the decrease supported speculation that the central bank stepped in to limit the won’s weakness last month.
“We can only assume the authorities may have sold dollars to slow the pace of decline in the won,” said Hong Seok Chan, a currency analyst at Daishin in Seoul. “The purpose would be just to ease swings in the exchange rate. The government still seems to prefer a weak won and doesn’t worry much about foreign investors’ selling of local assets.”
The yield on South Korea’s three-year government bonds rose three basis points to 1.80 percent and that for the 10-year notes advanced by the same amount to 2.43 percent, Korea Exchange prices show.