Korean Won Declines This Week After Economic Growth Target Cut

South Korea’s won had its biggest weekly drop since March and government bonds gained after the central bank cut the country’s growth forecast and signs of financial distress in Portugal spurred demand for safer assets.

The Bank of Korea yesterday reduced its 2014 expansion projection to 3.8 percent from 4 percent even as it held its benchmark rate at 2.5 percent. Nomura Holdings Inc. said in a report today that it expects the central bank to cut the key rate in August. A parent of Banco Espirito Santo SA, Portugal’s second-largest lender, missed debt payments this week.

The won fell 1 percent since July 4 and 0.5 percent today to 1,018.92 per dollar at the close in Seoul, according to data compiled by Bloomberg. The currency reached 1,020.75 earlier today, the weakest since June 25. One-month implied volatility, a gauge of expected swings in the exchange rate used to price options, increased 15 basis points, or 0.15 percentage point, this week to 4.84 percent.

“It seems investors are unwinding their short dollar bets as rate-cut speculation rises and also on Portugal debt concerns,” said Jeon Seung Ji, a Seoul-based currency analyst at Samsung Futures Inc.

The won’s decline could speed up once the dollar-won exchange rate breaks through 1,020, according to Kim Dong Wook, a Seoul-based currency trader for Kookmin Bank.

The yield on the 3.125 percent government bonds due March 2019 dropped three basis points for the week and one basis point today to 2.78 percent in Seoul, Korea Exchange Inc. prices show. That’s the lowest level for a similar-maturity sovereign note since May 2013. The 10-year yield fell five basis points this week to 3.07 percent, also the least since May last year.

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