Won Completes Worst Monthly Drop Since 2012 on Fed Rate Outlook

South Korea’s won completed its biggest monthly loss since May 2012 as the dollar strengthened on prospects for higher U.S. interest rates.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major counterparts, rallied 6.4 percent this quarter in its best performance in six years. The Federal Reserve indicated it plans to raise borrowing costs in 2015, damping demand for emerging-market assets. Global funds sold $752 million more South Korean stocks than they bought in September, snapping five months of net purchases, exchange data show.

“It’s the strong dollar driving emerging-market currencies weaker everywhere,” said Jeon Seung Ji, a Seoul-based foreign-exchange analyst at Samsung Futures Inc. “The won’s weakness shows Korea is not immune to what’s going to happen in terms of capital outflows as yields in the U.S. move higher.”

The won declined 3.9 percent this month and 4.1 percent for the quarter to 1,055.21 per dollar at the close in Seoul, according to data compiled by Bloomberg. The currency dropped 0.1 percent today and touched 1,057.15 earlier, the weakest level since April 4.

The government reported today that factory output fell 2.8 percent in August from a year earlier, the first contraction since May. That contrasts with the 2 percent gain forecast in a Bloomberg survey of economists and July’s 3.9 percent increase.

Bonds Rally

An official report on Sept. 26 showed the U.S. economy expanded by an annualized 4.6 percent in the second quarter, the fastest pace since 2011. Fed officials raised their end-2015 median estimate for the federal funds rate by 25 basis points to 1.375 percent on Sept. 17.

South Korea’s three-year government bonds rose in September as Nomura Holdings Inc. and Deutsche Bank AG predicted the central bank will lower the policy rate to a record 2 percent before year-end. Bank of Korea kept the rate at 2.25 percent on Sept. 12, after cutting it from 2.50 percent in August.

The yield on the 2.75 percent notes due June 2017 declined 21 basis points to 2.31 percent, the biggest monthly drop since July 2012, Korea Exchange prices show. The yield fell two basis points today.

One-month implied volatility in the won, a gauge of expected swings in the exchange rate used to price options, fell 22 basis points, or 0.22 percentage point, to 8.16 percent today. For the month, it climbed 2.45 percentage points.

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