Korean Won Drops Most in Two Weeks as Global Funds Sell Bonds

Updated on
  • Overseas funds cut Korea bond holdings by $476 million Monday
  • Won halts two-day gain as Asia currencies drop on Fed outlook

South Korea’s won dropped the most in two weeks as Asian currencies declined and after data showed overseas funds cut their holdings of the nation’s debt.

Global funds sold a net $476 million of Korean bonds on Monday, the most since March 23, a period in which they’ve predominately been buyers. The nation’s 10-year bond yield of 1.77 percent is less than the 1.82 percent on U.S. Treasuries and the difference may widen further as Federal Reserve officials indicate they are considering raising rates as soon as next month.

“The possibility of a U.S. rate hike has been highlighted recently and this has sparked foreign selling of domestic bonds,” said Kim Min Hyung, a fixed-income analyst at Daewoo Securities Co. in Seoul.

The won fell 0.8 percent to 1,192.70 per dollar at the 3 p.m. close in Seoul, the biggest decline since March 9, according to prices from local banks compiled by Bloomberg. The currency has weakened 4.5 percent this month, the worst performer in Asia after Malaysia’s ringgit.

All except one of the 12 major Asian currencies dropped against the dollar Tuesday as the probability the Fed will raise rates at its June meeting climbed to 32 percent, from 4 percent odds at the start of last week, according to data compiled by Bloomberg based on fed fund futures.

Record Low

The Bank of Korea kept its key interest rate at a record-low 1.5 percent when it met on May 13. Investors have pushed the three-year yield down to 1.45 percent, signaling they anticipate additional monetary easing. Central bank governor Lee Ju Yeol said this month the benchmark rate is “not insufficient to support the economy,” though cautioned against interpreting his comments as a signal for future policy decisions.

The three-year bond yield dropped two basis points on Tuesday and the 10-year yield fell three basis points percent.

The state-run think tank Korea Development Institute cut its growth projection for 2016 to 2.6 percent, from 3 percent. The revision comes after the the central bank lowered its own forecast to 2.8 percent in April. The institute also said monetary policy should be more accommodative to help inflation reach the central bank’s target.

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