Won Ends Three-Day Gain as Lee Seen Cutting Rates to Spur Growth

South Korea’s won ended three days of gains, weakening against every major currency, on growing speculation central bank Governor Lee Ju Yeol will cut interest rates for the first time in more than a year to revive growth.

The currency dropped as much as 0.3 percent in Seoul, paring its appreciation versus the dollar this year to less than 2 percent. The Bank of Korea will cut its benchmark interest rate tomorrow for the first time since May 2013, according to most analysts surveyed by Bloomberg. The nation’s jobless rate fell to 3.4 percent in July, the least since January, government data showed today.

“One cut by the BOK is already reflected in the exchange rate,” said Lee Hyun Kyung, a Seoul-based currency trader for Busan Bank. “The won could weaken further if the governor signals additional easing tomorrow.”

The won declined to 1,029.40 per dollar at the close in Seoul, according to data compiled by Bloomberg. The yield on the 2.75 percent government bonds due June 2017 was little changed at 2.52 percent, while that on the 3.5 percent securities maturing in March 2024 rose one basis point to 3.07 percent, Korea Exchange Inc. prices show.

Governor Lee will lower the seven-day repurchase rate to 2.25 percent from 2.50 percent, according to 14 of 18 analysts surveyed, with four predicting no change. This reduction alone won’t be enough to divert the won from its present course, Gareth Berry and Maximillian Lin, analysts in UBS AG, wrote in a report today. They see the Korean currency rising toward UBS's three-month target of 1,000 per dollar.

Slowing Growth

The government last month cut its 2014 economic-growth forecast to 3.7 percent from 3.9 percent and unveiled a 11.7 trillion-won ($11.4 billion) spending plan. President Park Geun Hye called for “all measures” to prevent the nation from entering a “long tunnel” of depression.

The won’s one-month implied volatility, a gauge of expected swings in the exchange rate used to price options, dropped 19 basis points, or 0.19 percentage point, to 6.54 percent.

Three-year bond futures for September delivery fell 0.01 to 106.98, while 10-year contracts retreated 0.11 to 116.50, Korea Exchange Inc. data show. The rate on one-year interest rate swap was little changed at 2.46 percent, according to data compiled by Bloomberg.

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