Korean Won Drops to Three-Week Low as Fed Signals Rate Increase

South Korea’s won fell to the lowest in more than three weeks and government bonds dropped after Federal Reserve Chair Janet Yellen signaled the U.S. central bank will raise interest rates.

Yellen’s remarks came yesterday after the Federal Open Market Committee announced a $10 billion cut in its monthly bond purchases to $55 billion and said the stimulus could end this fall if the central bank continues to taper in “measured steps.” Overseas investors sold more South Korean shares than they bought for a ninth day, exchange data show. The nation’s parliament yesterday approved the nomination of Lee Ju Yeol to become the next governor of the Bank of Korea.

“Yellen’s comments triggered a long-dollar sentiment,” said Jahng Won, a currency dealer for Shinhan Bank in Seoul. “The dollar-won exchange rate could have moved higher, but local exporters selling the greenback limited its rise.” A long position is a bet an asset will rise in value.

The won depreciated 0.5 percent to 1,076.20 per dollar at the close in Seoul, according to data compiled by Bloomberg. The currency touched 1,077.07, the weakest level since Feb. 24. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, climbed 16 basis points, or 0.16 percentage point, to 7.54 percent.

The FOMC decision is likely to have limited impact on South Korea’s economy, Yoon Tae Sik, a director at the Finance Ministry, said by telephone after an internal meeting to discuss the U.S. central bank’s announcement.

Fed Outlook

Yellen indicated yesterday that the federal funds rate may start to rise about six months after the monetary authority ends its stimulus program. U.S. officials boosted their forecast for the key rate, predicting it would climb at least to 1 percent by the end of 2015 and 2.25 percent a year later.

An increase in U.S. yields on the prospect of policy tightening may spur capital outflows from Korea and increase depreciation pressure on the won, Young Sun Kwon, a senior economist at Nomura Holdings Inc., wrote in a note today.

The yield on the benchmark 3 percent sovereign notes due December 2016 rose three basis points to 2.87 percent, Korea Exchange Inc. prices show. That’s the biggest increase since March 3.

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