Won Declines as U.S. Data, Ukraine Tension Boost Dollar Demand

South Korea’s won weakened as better-than-expected U.S. data and tensions in Ukraine boosted demand for the greenback.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose to a six-month high after reports yesterday showed U.S. service industries grew at the fastest pace since 2005 and factory orders beat economists’ estimates. Russian President Vladimir Putin ordered his government to prepare a response to U.S. and European sanctions over his support of a rebellion in eastern Ukraine.

The won snapped a two-day gain to decline 0.5 percent to 1,033.70 per dollar at the close in Seoul, according to data compiled by Bloomberg. One-month implied volatility, a gauge of expected swings in the exchange rate used to price options, rose 52 basis points to 6.85 percent.

“U.S. data and risks surrounding Ukraine are the main reasons the won is weakening against the dollar,” said Kim Mijung, a Seoul-based currency trader at Suhyup Bank.

The U.S. Institute for Supply Management’s non-manufacturing index rose to 58.7 for July, the highest since December 2005 and exceeding the top estimate in a Bloomberg survey, figures showed yesterday. A government report showed factory orders in the world’s biggest economy rose 1.1 percent in June, almost double the 0.6 percent gain forecast in a separate Bloomberg poll.

South Korea outlined plans today to lower dividend taxes and offer tax breaks to companies increasing wages. Finance Minister Choi Kyung Hwan said at a forum in Seoul that the government is aware of concern the economy may face a period of Japan-style stagnation.

Bonds Drop

Government bonds declined, with the yield on notes due June 2017 rising two basis points, or 0.02 percentage point, to 2.54 percent, according to Korea Exchange Inc. prices. The yield on the March 2024 securities advanced three basis points to 3.10 percent.

Foreign investors net sold 11,303 three-year futures contracts today, the most since April 3, Korea Exchange Inc. prices show. The Bank of Korea holds its next monetary policy meeting on Aug. 14.

“The decline in bonds were triggered by foreigners selling futures, and it seems they took profit as rate-cut expectations are already reflected in the market,” said Kim Moon Il, a Seoul-based fixed-income analyst at Korea Exchange Bank Futures Co.

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