Korea Won Retreats From 16-Month High on Fed Minutes; Bonds Fall

South Korea’s won retreated from a 16-month high after the Federal Reserve indicated it may end monetary stimulus that boosts the supply of dollars in 2013. Government bonds declined after the Bank of Korea signaled it will not be adding to last year’s two interest-rate cuts.

Fed policy makers said they will probably end their $85 billion monthly bond purchases sometime in 2013, with members divided between a mid- or end-of-year finish, according to minutes of last month’s meeting that were released yesterday in Washington. Bank of Korea Governor Kim Choong Soo said yesterday the central bank will seek other ways to spur economic growth than using monetary policy.

The won fell 0.2 percent to close at 1,063.68 per dollar at 3 p.m. in Seoul, according to data compiled by Bloomberg. It touched 1,061.64 yesterday, the strongest level since Sept. 2, 2011 and gained 0.6 percent this week.

“A possible end to the Fed’s monetary stimulus is damping sentiment,” said Yoo Hyen Jo, analyst at Shinhan Investment Corp. in Seoul. “Additionally, there are concerns in the local market that authorities may try to stem the won’s appreciation.”

Finance Minister Bahk Jae Wan said this week he is concerned about herd behavior in the foreign-exchange market and the government is actively considering measures to curb volatility in the won, which was Asia’s best-performing currency of 2012 with an 8.3 percent advance versus the dollar. The nation’s foreign-exchange reserves rose $880 million in December to $326.97 billion, the smallest increase since a drop in May, data from the central bank showed today.

Rate Outlook

The yield on South Korea’s 2.75 percent bonds due 2017 fell two basis points, or 0.02 percentage point, to 2.89 percent, according to Korea Exchange prices. The central bank is probably “done with rate cuts,” Credit Agricole CIB said in a research note today, after the finance ministry said yesterday it plans to spend 45.1 percent of this year’s budget in the first quarter to support the economy.

Policy makers at the Bank of Korea next meet on Jan. 11 to review borrowing costs. The central bank kept the benchmark seven-day repurchase rate at 2.75 percent last month, after cuts of 25 basis points at reviews in July and October.

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