Korea's Won Drops to Asia Worst as Rate-Cut Bets Spur Bond Rally

  • Geopolitical tensions from North Korea weigh on sentiment
  • Samsung Futures predicts won will weaken to 1,250 in March

South Korea’s won posted the biggest monthly decline since July as odds for another interest-rate cut build, just as the outlook for higher U.S. borrowing costs boosts the dollar.

The currency fell to a five-year low versus the greenback on Monday and is Asia’s worst performer this month as North Korea’s rocket launch on Feb. 7 weighed further on sentiment. The won weakened even as an index of South Korean local-currency bonds climbed in February by the most since September, driving the three-year yield to four basis points below the central bank’s benchmark rate. One of the seven policy board members voted for a cut at this month’s meeting.

The won declined 3 percent this month while rising 0.1 percent from Friday to close at 1,236.65 a dollar in Seoul, according to data compiled by Bloomberg. The Group of 20 finance ministers didn’t offer up much from their gathering in Shanghai over the weekend, other than to say they will refrain from competitive currency devaluations.

"Speculation for higher U.S. interest rates has revived, supporting strength in the dollar and adding to weakness in the won," said Jeon Seung Ji, a foreign-exchange analyst at Samsung Futures Inc. in Seoul, who predicts the won will weaken to 1,250 in March. "The G-20 failed to meet expectations that major countries will come up with some form of coordinated stimulus plan or measures to deal with currency volatility."

The won dropped to as low as 1,245.13 on Monday, the weakest level since June 2010, and has declined 3 percent this month, the biggest slide among 24 emerging-market exchange rates tracked by Bloomberg after the Argentine peso. Eight of 23 economists surveyed expect the central bank to lower its key 1.5 percent rate in March to try and support growth and exports, which have contracted for 14 straight months.

South Korean Finance Minister Yoo Il-ho said he believes it’s right to resume a currency swap with the U.S. and extend one with China, according to local media reports citing the G-20 meeting. Those officials said in a communique that they "will use fiscal policy flexibly to strengthen growth, job creation and confidence."

Government bonds rose 1.5 percent in February, according to a Bloomberg index, which climbed to a record on Friday. The 10-year yield fell 19 basis points this month to 1.79 percent and touched an unprecedented 1.77 percent on Feb. 11, Korea Exchange prices show. The 2018 yield dropped 11 basis points to 1.46 percent, two basis points off an all-time low on Feb. 16.

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