Korean Won Snaps Three-Day Gain on Intervention Risk; Bonds Rise

South Korea’s won snapped a three-day advance amid speculation policy makers will intervene to weaken the currency, which yesterday reached the strongest level since February. Government bonds climbed.

The won rose as much as 0.45 percent against the dollar yesterday, before temporarily erasing gains in a half-hour period on suspected dollar purchases by the central bank. The currency is still up 5.1 percent this quarter, the best performance among 31 major currencies tracked by Bloomberg, and that erodes the competitiveness of exports that account for about 45 percent of South Korea’s gross domestic product.

The won declined 0.2 percent to 1,086.55 per dollar in Seoul, according to data compiled by Bloomberg. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, increased nine basis points, or 0.09 percentage point, to 7.67 percent.

“Traders are cautious about betting aggressively on the won, especially when it heads toward the 1,080 level, because of the risk of intervention,” said Choi Sung Hyun, a currency trader at Woori Bank in Seoul. “Ahead of the holidays, companies may need to buy the won to cover expenses, and foreign investors are buying local shares, which may limit the won’s decline.”

South Korea’s markets are shut Sept. 18-20 for a public holiday. Overseas investors bought more local equities than they sold for the 14th straight day today, as data showed the unemployment rate fell to 3.1 percent in August from 3.2 percent in July.

‘Definitely Cautious’

The won fell as much as 0.5 percent today, the biggest intra-day loss since Aug. 22.

“Traders are definitely cautious after yesterday’s possible intervention by the government,” said Jude Noh, a currency trader at Suhyup Bank in Seoul. “We suspect the authorities may have stepped in briefly today,” said Han Sung Min, a currency trader at Busan Bank in Seoul.

South Korea will take steps to check currency volatility, including imposing a levy on banks’ foreign-currency debt and a cap on lenders’ currency forward positions, if “herd behavior” causes drastic movements, the Finance Ministry said in a report submitted to parliament in June.

The won may outperform other Asian currencies in 2014, Credit Agricole CIB said in a note yesterday, citing the nation’s current-account surplus and short-term debt. It said it expects the currency to strengthen to 1,080 per dollar by the end of this year and 1,040 by end-2014.

The yield on South Korea’s 2.75 percent bonds due June 2016 dropped one basis point to 2.95 percent, Korea Exchange Inc. prices show. Bank of Korea will probably hold its interest rate at 2.5 percent in a policy meeting tomorrow, according to the median estimate of 15 analysts in a Bloomberg survey.

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