Won, Bonds Fall After North Korea Nuclear Threat, UN Sanctions

South Korea’s won and government bonds fell after North Korea threatened to launch a preemptive nuclear strike against the U.S. and other “aggressors,” increasing geopolitical risk.

The UN Security Council voted unanimously to impose tougher sanctions on North Korea over a forbidden nuclear test, just hours after the totalitarian state warned yesterday it would act to defend its “supreme interests.” Tougher sanctions may cause provocation from the communist nation, South Korean central bank Senior Deputy Governor Park Won Shik said at an emergency meeting in Seoul today. The won dropped to a four-day low after the yen’s decline sparked concern the country may act to weaken its currency to protect exports.

“Concerns that North Korean risks are heightening are driving investors away, weakening the currency and the stock market,” said Jang Bo Hyeong, analyst at Hana Institute of Finance in Seoul. “The yen’s decline is also spurring concerns that South Korea’s competitiveness may be hurt.”

The won declined 0.3 percent to 1,090.46 per dollar in Seoul, taking the loss this week to 0.5 percent, according to data compiled by Bloomberg. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 21 basis points, or 0.21 percentage point, to 6.98 percent today.

North Korea will close a border liaison channel with South Korea, the North’s official Korean Central News Agency said today, carrying a statement from Peaceful Reunification of Korea, the communist state’s propaganda organization. South Korea will sternly respond to any North Korean provocation, President Park Geun Hye said in a speech today.

Close Monitoring

The Bank of Korea will closely monitor financial markets and work with the government to ensure stability if needed, the central bank’s Park said at today’s meeting. The Finance Ministry will hold a meeting tomorrow to discuss financial markets and the North Korean risk.

Japanese policies that have weakened the yen by 14 percent against the dollar in the past three months are threatening the competitiveness of Korean companies such as Samsung Electronics Co. and Hyundai Motor Co. The won gained 0.2 percent against its Japanese counterpart to 11.44 per yen today.

The yield on the 2.75 percent bonds due September 2017 rose one basis point to 2.78 percent, according to prices from Korea Exchange Inc.

Before it's here, it's on the Bloomberg Terminal.