Won Falls Most in Two Weeks, Bonds Drop on Fed Taper Prospects

South Korea’s won fell the most in two weeks and government bonds declined as signs the U.S. economy is improving bolstered the case for the Federal Reserve to pare stimulus that has fueled fund flows to emerging markets.

Retail sales in the world’s largest economy rose for a fourth month in July, according to official data released yesterday, while reports due this week are forecast to show manufacturing in New York expanded at the fastest pace in six months and claims for jobless benefits declined. Sixty-five percent of economists in a Bloomberg survey said Fed Chairman Ben S. Bernanke will cut the central bank’s $85 billion of monthly bond buying in September.

The won dropped 0.3 percent to 1,118.74 per dollar in Seoul, the biggest decline since July 31, according to data compiled by Bloomberg. The currency weakened as much as 0.5 percent today and has lost 0.6 percent this week.

“There seems to be a market consensus that the Fed tapering will start in September, pushing down the won and bonds,” said Park Dongjin, a fixed-income analyst at Samsung Futures Inc. in Seoul. “It is getting priced in, as we’re seeing the long-term bond yields rising especially.”

The yield on the 2.75 percent sovereign bonds due June 2016 increased six basis points to 2.98 percent, according to Korea Exchange Inc. prices. The yield on the 10-year notes rose 11 basis points to 3.66 percent, the highest since June 24.

South Korea’s unemployment rate held at 3.2 percent for a third month in July, in line with the median estimate in a Bloomberg survey, according to official data released today.

One-month implied volatility in the won, a measure of expected moves in the exchange rate used to price options, climbed 26 basis points, or 0.26 percentage point, to 7.31 percent.

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