Won Drops to Two-Week Low as BOK Fails to Dispel Rate-Cut Bets

  • Central bank holds rate at 1.5%, raises special business loans
  • Bonds advance as risks to growth boost demand for safety

The won weakened to a two-week low and government bonds rose after the Bank of Korea failed to convince investors it won’t cut interest rates amid the global financial turmoil that’s spurred outflows from its stocks and debt.

The currency retreated as much as 0.9 percent as the central bank kept its benchmark rate at a record low of 1.5 percent on Tuesday and one of the seven board members called for a reduction. Governor Lee Ju Yeol said he will increase special loans to small- and medium-sized businesses, while acknowledging that the current rate is supportive of a recovery. The BOK can take action if market volatility rises and will monitor the risks posed by North Korea, he said. The won led declines in Asia as the Chinese yuan fell the most in a month, sparking losses in regional currencies.

The won dropped 0.7 percent to close at 1,216.53 a dollar in Seoul and reached 1,219.31, the lowest level since Feb. 3, according to data compiled by Bloomberg. The currency has retreated 3.6 percent this year, the most in Asia, global investors pulled a net $2.9 billion from the nation’s shares and also turned sellers of bonds last week.

"The dissenting view in the BOK board added to the won’s drop, though it will be hard to fall below 1,220 a dollar," said Kim Dae Hun, a currency trader at Busan Bank Co. in Seoul. "The won’s move was in line with Asian currencies’ weakness today, which was driven by a fall in the yuan. It looks like the market is still sensitive to risk factors."

The won may drop to 1,237 by year-end, according to the median estimate in a Bloomberg survey of analysts, which would represent a third straight annual loss. Uncertainties to growth have increased, the BOK said in a statement, adding that it will monitor any changes in the monetary policies of major countries, capital flows and geopolitical risks.

“Increased expectations the BOK will lower rates in the foreseeable future will push the won weaker," said Yuna Park, a foreign-exchange and fixed-income analyst at Seoul-based Dongbu Securities Co., who predicts the currency will weaken to 1,230 by March 31.

Special Loans

The BOK raised special loans to businesses by 9 trillion won ($7.4 billion). Governor Lee said the impact of any rate cut is now weaker than before and the central bank needs to be cautious on policy amid external risks.

The three-year sovereign bond yield declined five basis points to an unprecedented 1.44 percent, Korea Exchange prices showed. The 10-year yield dropped four basis points to 1.78 percent, one basis point from the Feb. 11 record low.

Before it's here, it's on the Bloomberg Terminal.