Korean Won Weakens to Five-Year Low as Rate-Cut Bets Increase

  • `More than reasonable' to expect a reduction: Credit Agricole
  • Currency could drop a further 5 percent, Kookmin Bank says

The won fell to a five-year low as bets increased the Bank of Korea will lower its policy rate and a drop in oil deterred risk-taking.

One of seven of the central bank’s board members called for a reduction as it left the benchmark interest rate at a record low of 1.5 percent on Tuesday. It would be "more than reasonable" to expect a cut in the next few months, Gary Yau, a strategist at Credit Agricole CIB in Hong Kong, wrote in a report. Crude dropped the most in a week overnight on speculation a pledge by Saudi Arabia and Russia to freeze production at January levels won’t push up prices.

"Bets for the BOK’s rate cut increased, giving investors a reason to buy the dollar against the won," said Dong-Wook Kim, a foreign-exchange trader at Kookmin Bank in Seoul. "The deal to fix oil production won’t help in reviving risk appetite. Not many Korean exporters are selling dollars even with recent weakness in the won."

The won dropped 0.9 percent to close at 1,226.98 a dollar in Seoul after falling to 1,228.34, the weakest level since July 2010, according to data compiled by Bloomberg. The currency has retreated 4.5 percent this year, the most in Asia. One-month implied volatility in the won, a measure of exchange-rate swings used to price options, rose 57 basis points to 12.81 percent, the highest since July 2013.

Won Forecasts

South Korea’s January jobless rate was 3.5 percent, unchanged from the previous month’s revised number, the statistics office reported Wednesday. Five of 24 economists surveyed by Bloomberg predict the BOK will cut rates in March. Credit Agricole maintained its forecast for no change, while acknowledging an increased chance of a reduction this year, according to the note.

There aren’t many technical barriers to stop the won weakening more than 5 percent to 1,290 per dollar, Kookmin Bank’s Kim said. The currency will drop to 1,239 by the end of the year, according to the median estimate in a Bloomberg survey of analysts.

Ten-year sovereign bonds fell, pushing the yield up one basis point to 1.79 percent, off two basis points from a record low on Feb. 11, Korea Exchange prices show. The three-year yield was steady at an unprecedented 1.44 percent.

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