Won Rises as Foreign Funds Buy South Korean Stocks; Bonds Drop

The won advanced for a second day after a surge in U.S. equity markets prompted global funds to buy South Korean stocks. Government bonds fell.

The Dow Jones Industrial Average rallied to a record 14,253.77 yesterday, erasing losses from the financial crisis, while Asian shares climbed as investors bet global central banks will continue stimulus measures. Foreign funds boosted their holdings of South Korean bonds and equities to an all-time high in February, data from the Financial Supervisory Service showed today. Stock holdings increased by 1.5 trillion won ($1.4 billion) to 421.2 trillion won.

“Rising optimism on the U.S. and the global economies is helping boost stock markets and prompting investors to buy riskier assets in emerging markets,” said Hong Seok Chan, an analyst at Daishin Economic Research Institute in Seoul. “Foreign-fund inflows are supporting the won, while concerns that authorities may not let the won gain too much are limiting gains.”

The won climbed 0.4 percent to 1,082.60 per dollar in Seoul, according to data compiled by Bloomberg. The currency posted its largest gain since Feb. 4 yesterday. One-month implied volatility for the won, a measure of expected moves in the exchange rate used to price options, fell 40 basis points, or 0.4 percentage point, to 6.44 percent. The Kospi index of shares closed up 0.2 percent.

Reserves Drop

South Korea’s foreign-exchange reserves dropped by $1.51 billion to $327.4 billion as of end-February due to the weakness of the euro and the pound against the dollar, the central bank said in a report today. The drop in the reserves is the first since May.

Currency stability is needed to protect local companies and the nation will “pre-emptively, effectively” respond to exchange-rate risk, according to an e-mailed statement from President Park Geun Hye’s spokesman Park Sun Kyoo last month.

The yield on the 2.75 percent bonds due September 2017 rose one basis point to 2.74 percent, according to prices from Korea Exchange Inc.

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