Korea Won Slides Most in Two Weeks on Weaker Yen; Bonds Decline

The won declined the most in two weeks as a weakening yen threatened South Korea’s export outlook and after data showed the nation’s foreign-exchange reserves fell. Government bonds dropped.

While the won gained 1 percent in the past five days, the yen dropped 3 percent to 100.79 per dollar, potentially damaging the earnings of Korean companies like Hyundai Motor Co. that compete against Japanese rivals overseas. South Korean reserves fell to $326.4 billion at the end of June, the lowest since November, the central bank said in a statement. Overseas funds sold more local stocks than they bought today, adding to $8 billion in net sales this year through yesterday.

The won weakened 0.9 percent to 1,143.75 per dollar in Seoul, the biggest loss since June 20, according to data compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, climbed 19 basis points, or 0.19 percentage point, to 10.7 percent, following a six-day decline.

“A yen above 100 to the dollar is a negative factor for the won, and the fall of the foreign reserves, considered a buffer in the market, is not good news,” said Park Jung Hyun, a currency dealer at Hana Bank in Seoul. “Additionally, foreign investors net sold won-denominated assets today.”

Park added that investors are still concerned about the Federal Reserve’s plans to ease its $85 billion a month of bond purchases, which drove funds to emerging markets. Fed Chairman Ben S. Bernanke said on June 19 that the monetary authority may begin to taper the program this year if the economy improves. U.S. employers added the most workers last month since February, bolstering the case for the Fed to cut the bond purchases, a Bloomberg survey showed before data due today.

Potential Measures

Nomura Holdings Inc. bet the won will weaken, given South Korea’s vulnerability to a Fed exit from quantitative easing and as the threat from Japan’s yen depreciation picks up, Craig Chan, a Singapore-based strategist, wrote in a research note today. Finance Minister Hyun Oh Seok said in parliament that the markets are reacting too early to a possible end of the Fed’s stimulus program.

A Bank of Korea board member called for measures to respond to changes in developed-nation monetary policies, according to the minutes of the central bank’s June 13 rate meeting released yesterday. The monetary authority left its key rate unchanged at 2.5 percent last month after a surprise cut in May.

The yield on the 2.75 percent bonds due June 2016 rose two basis points to 2.96 percent, prices from Korea Exchange Inc. show.

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