Korean Bonds, Won Gain as Fed Officials Express Growth Concern

South Korea’s bonds gained the most in a week and the won rose after Federal Reserve meeting minutes showed U.S. policy makers are concerned a global slowdown and a stronger dollar pose risks to the world’s largest economy.

The Bank of Korea will lower its benchmark interest rate to 2 percent on Oct. 15, according to 10 of 16 economists surveyed by Bloomberg. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, closed at a two-week low on Oct. 8 as minutes of the Sept. 16-17 Fed meeting showed some officials said U.S. expansion might be slower than estimated. The Kospi index of South Korean stocks closed at the lowest level since May as foreign funds pulled $715 million from the nation’s equities this week.

The yield on the 2.75 percent government bonds due June 2017 fell four basis points, the most since Oct. 1, to 2.26 percent at the close in Seoul today and rose one basis point this week, Korea Exchange prices show. The yield on the five-year debt declined two basis points to 2.46 percent today.

“The dovish Fed minutes supporting the won versus the greenback will be partly offset by the decline in stocks,” said Jude Noh, Seoul-based chief currency dealer at Suhyup Bank. “The market will be focusing on whether further strength in the dollar can move the dollar-won rate beyond 1,080 ahead of the monetary policy decision.”

The won rose 0.4 percent to 1,070.45 per dollar, according to prices from local banks compiled by Bloomberg. It weakened 0.8 percent from Oct. 2. Local markets were shut Oct. 3 and yesterday for holidays.

One-month implied volatility in the won, a gauge of expected swings in the exchange rate used to price options, fell two basis points, or 0.02 percentage point, today and 73 basis points for the week to 7.64 percent. The Bloomberg dollar index rose 0.3 percent yesterday as the Standard & Poor’s 500 Index declined 2.1 percent.

South Korea can afford expansionary policies given its fiscal health and that it has room for rate cut, a government statement cited Finance Minister Choi Kyung Hwan as saying to international investors yesterday.

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