Won Posts Biggest Weekly Drop in 21 Months on Fed; Bonds Fall

The won had its biggest weekly drop in 21 months and bonds slumped after South Korean Finance Minister Hyun Oh Seok said contingency plans are being reviewed as the Federal Reserve’s possible stimulus cuts roil markets.

Capital outflows from developing nations may increase and the government is closely monitoring the situation, he said. South Korea may take market-stabilizing steps on June 24 if needed, according to a Yonhap News report today citing Financial Services Commission Chairman Shin Je Yoon. The Kospi index of shares lost 3.5 percent since the Federal Reserve signaled June 19 that it may start reducing bond purchases this year.

The won fell 2.5 percent to 1,154.15 per dollar in Seoul this week, the biggest decline since the five days ended Sept. 23, 2011, according to data compiled by Bloomberg. The currency fell 0.7 percent today and touched 1,159.33, the weakest level in almost 12 months.

“Since Bernanke’s comments about the possible early stimulus exit, the currency, bonds and stocks all performed poorly, similar to other Asian markets,” said Son Eun Jeong, an analyst at Woori Futures Co. in Seoul. There is speculation authorities intervened to support the won, she said.

The yield on the 2.75 percent government bonds due March 2018 rose 28 basis points this week and 10 basis points today to

3.26 percent, prices from Korea Exchange Inc. show. That was the biggest weekly increase for a benchmark five-year note since October 2010.

Default Swaps

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, surged 258 basis points, or 2.58 percentage points, this week to 12.98 percent. It climbed 75 basis points today to a January 2012 high.

The cost of insuring South Korean sovereign debt using five-year credit default swaps rose 23 basis points this week through yesterday to 107 basis points, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That was the highest level since August 2012.

A report released yesterday suggested Chinese manufacturing will decrease at a faster pace this month than in May. The preliminary reading of 48.3 for a Purchasing Managers’ Index released yesterday by HSBC Holdings Plc and Markit Economics compares with the 49.1 median estimate in a Bloomberg survey and the final reading of 49.2 in May. Fifty is the dividing line between expansion and contraction.

Credit Suisse Group AG cut South Korea’s growth forecast this year to 2.5 percent from 2.7 percent, saying it’s “particularly concerned” about the impact of the weaker Chinese economy on Korean exports, Hong Kong-based analyst Christiaan Tuntono wrote in a research note today.

Fed Chairman Ben S. Bernanke will cut the central bank’s $85 billion monthly bond purchases by $20 billion at the Sept. 17-18 policy meeting, according to 44 percent of economists in a Bloomberg survey.

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