Korean Won Drops as Government Considers Trading Tax; Bonds Gain

South Korea’s won fell for a second day after Deputy Finance Minister Choi Jong Ku proposed taxes on currency trading and bonds to limit “speculative” capital inflows. Government debt advanced.

The currency had its first monthly drop since August following pledges by officials to curb appreciation. It rose 8.3 percent in 2012, the most among 16 major currencies tracked by Bloomberg, as global funds pumped $15.1 billion into local stocks. The government wants to cut the “vicious cycle” in which fast money inflows increase won volatility, Choi said yesterday in Seoul, adding that he sometimes questions whether a flexible exchange rate is “appropriate” for South Korea.

“Authorities have made it clear they want to reduce the volatility of the won,” said Yoo Hyen Jo, an analyst at Shinhan Investment Corp. in Seoul. “Exporters are looking to sell dollars to convert their proceeds, which will limit declines.”

The won fell 0.3 percent to 1,088.59 per dollar in Seoul, according to data compiled by Bloomberg. The currency has declined 2.2 percent this month. One-month implied volatility in the won, a gauge of expected moves in the exchange rate used to price options, rose 13 basis points, or 0.13 percentage point, today to 7.91 percent and has climbed 305 basis points this month, the most since May, the data show.

The government will soon decide on “tax measures that are suitable for our market conditions,” Choi said. “South Korea opposes a Tobin tax in its traditional form, as it could cause unintended consequences in the market,” he said, referring to the concept of a charge on international money flows and named after James Tobin, the Nobel Prize-winning U.S. economist who first suggested the idea in 1971.

The yield on South Korea’s 2.75 percent bonds due September 2017 dropped two basis points to 2.89 percent, Korea Exchange prices show.