Bloomberg News

Korea Won Snaps Four-Day Rally as Fed Cuts U.S. Growth Forecast

June 23, 2011

June 23 (Bloomberg) -- South Korea’s won weakened for the first time in five days after the Federal Reserve trimmed its economic growth forecast for the U.S., prompting declines in stocks and reducing demand for emerging-market assets.

The Fed maintained its vow to keep interest rates low for an “extended period,” predicting the economy will grow as much as 2.9 percent this year, down from April’s forecast of up to 3.3 percent. Separately, South Korea’s finance regulator plans to tighten rules related to banks’ loan-to-deposit ratios as the government seeks to rein in rising household debt.

“The Fed’s projections prompted stock markets to decline and is also weighing on the currency, damping risk demand,” said Cho Young Bok, a currency dealer at Daegu Bank in Seoul. “On top of that, the Greek debt issue hasn’t been resolved and lingering concerns are weakening the won.”

The won fell 0.3 percent to 1,076.80 per dollar as of the 3 p.m. close in Seoul, according to data compiled by Bloomberg. It touched 1,073.55 yesterday, the strongest level since May 11. South Korea’s benchmark Kospi index fell 0.4 percent.

The Financial Supervisory Service will more closely monitor lending at the country’s financial institutions’ and tighten control of the loan-deposit ratio, FSS Governor Kwon Hyouk Se told lawmakers today at a forum in Seoul, according to an e- mailed copy of his speech. Household debt rose for eight quarters through March to a record 801.4 trillion won ($744 billion), prompting the central bank to lift its policy rate by a quarter of a percentage point to 3.25 percent on June 10.

The yield on the 4 percent government bonds due March 2016 was unchanged at 3.94 percent, according to prices from Korea Exchange Inc.

--Editors: Sandy Hendry, Andrew Janes

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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