Korea Won Falls to 11-Month Low, Bonds Slide on Bernanke Signal

The South Korean won plunged to an 11-month low and the five-year government bond yield surged to the highest since July 2012 after the Federal Reserve said it may ease its stimulus that boosted flows to emerging markets.

The Federal Open Market Committee yesterday left the monthly bond purchases unchanged at $85 billion, with Chairman Ben S. Bernanke saying the Fed may start tapering the program later this year if the U.S. economy performs in line with central bank projections. Foreign investors sold more South Korean stocks than they bought for a 10th day, the longest run of net sales in almost three months, while an offering of inflation-linked government bonds this week raised less than a 10th of the planned 600 billion won ($524 million).

“The market reacted to the possibility of the Fed reducing its bond-buying program, and on fears of outflows from emerging markets,” said Jeon Seung Ji, an analyst at Samsung Futures Inc. in Seoul. “If the won weakens too much, the government could step in to curb volatility.”

The currency fell 1.3 percent to 1,145.63 per dollar in Seoul, according to data compiled by Bloomberg. It touched 1,146.55, the weakest level since July 26, 2012.

The yield on the 2.75 percent sovereign bonds due March 2018 rose 18 basis points to 3.16 percent, the highest level for a benchmark five-year security since July 11, 2012, prices from Korea Exchange Inc. show.

Bond Sale

South Korea sold 55.6 billion won of 10-year inflation-linked bonds, falling short of the planned amount of 600 billion won, according to a statement posted on the Finance Ministry’s website.

South Korea is closely monitoring financial markets and preparing a contingency plan for the Fed’s early exit from quantitative easing, a finance ministry official said in Seoul today, asking not to be named due to government policy.

Separately, the Finance Ministry said there was no bond sell-off by foreigners today. The rise in yields is a spillover effect from U.S. Treasuries following Bernanke’s comments yesterday, Kim Jin Myung, a director at the ministry’s treasury bureau, said by phone.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 106 basis points, or 1.06 percentage points, to 11.78 percent.