Won Adds to Biggest Rally Since 2010 as Yields Fall to Records

  • Gains supported by oil above $51 a barrel and dollar weakness
  • Bank of Korea seen holding rate at 1.5 percent on Thursday

South Korea’s won rose for a fourth day as receding bets for U.S. interest-rate increases damped demand for the dollar, while the Asian nation’s bond yields hit a record low after the government unveiled a recapitalization plan for state banks.

The won completed in its longest run of gains since March and led an advance in Asia as crude oil prices climbed above $51 a barrel for the first time since October. South Korean bonds rose on the plan to create an 11 trillion won ($9.5 billion) fund to bolster finances at state lenders to help them better absorb shocks. The central bank meets on Thursday, and is expected to keep borrowing costs unchanged.

“The dollar’s weakness on the poor U.S. jobs data and firmer oil prices, with WTI trading above $50 per barrel, are helping investor sentiment,” said Ha Keon Hyeong, an economist at Shinhan Investment Corp. in Seoul.

The won climbed 0.5 percent to 1,156.75 per dollar in Seoul, prices from local banks compiled by Bloomberg show. That added to Tuesday’s steepest gain since June 2010. The currency has appreciated 3.1 percent over the past four days.

Traders see a zero percent chance the Fed will hike rates by its June 14-15 meeting, down from 24 percent a week ago, futures contracts indicate. There’s a 59 percent probability the central bank will increase rates by year-end.

Easing Probability

South Korean bonds rose for a third consecutive session. The yield on three-year sovereign notes fell by two basis points to 1.39 percent, while the yield on 10-year debt was down one basis point at 1.70 percent. 

A Bloomberg survey of 18 analysts shows all but one expect policy makers to hold the benchmark interest rate at 1.5 percent on Thursday.

“Now that the general outline of the capital injection measures has come out, it is only a matter of time before the Bank of Korea cuts the rate,” said Hwangbo Youngok, a managing director of fixed-income, currency and commodities at Korea Investment & Securities in Seoul. "If the central bank moves preemptively, the cut could come as early as tomorrow.”

Additional fiscal stimulus as well as monetary easing should be swiftly implemented to support growth in South Korea, the International Monetary Fund said on Wednesday, adding that it sees Asia’s fourth-largest economy expanding 2.7 percent in 2016.

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