Won Drops Most in Three Weeks After BOK Rate Cut; Bonds Advance

South Korea’s won snapped a four-day rally to slide the most in three weeks as the central bank unexpectedly cut borrowing costs. Government bonds gained.

Governor Kim Choong Soo and his board lowered the benchmark seven-day repurchase rate to 2.5 percent from 2.75 percent, the central bank said in a statement in Seoul today, joining monetary authorities in Australia, Europe and India in easing policy. Six of 20 economists surveyed by Bloomberg News predicted the move while the rest forecast no change. Kim, who opposed a cut last month, backed the reduction.

“The board probably found it difficult to hold out further without taking any action, given that other central banks are so active in protecting their economies,” said Choi Seok Won, head of research at Hanwha Securities Co. in Seoul. “A stronger won is another reason for today’s rate cut.”

The currency fell 0.4 percent to 1,091.40 per dollar in Seoul, according to data compiled by Bloomberg. That’s the biggest drop since April 18. It earlier touched 1,081.97 per dollar, the highest since Feb. 28. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose three basis points, or 0.03 percentage point, to 6.56 percent, the data showed.

The one-year interest-rate swap fell six basis points to 2.59 percent in Seoul, according to data compiled by Bloomberg. The yield on the 2.75 percent government bonds due March 2018 slipped one basis point to 2.62 percent, exchange data showed.

‘Forward-Looking’

Today’s central bank decision came after a four-to-three vote by the board against a cut last month, which showed the deepest division among policy makers since 2006, and as data give a mixed picture of Asia’s fourth-largest economy. Ruling New Frontier Party floor leader Lee Hahn Koo yesterday urged a “more active role” for the BOK, adding to political pressure for a cut.

The Bank of Korea’s stance should be “forward-looking” in order to boost investment, Lee said at a meeting yesterday, according to an e-mailed statement from the party. The central bank had kept interest rates unchanged since October, defying pressure from the government for a reduction even as a weaker yen threatened to hurt exports by making Japanese products cheaper.

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