Bloomberg News

Korean Won Falls as Europe Debt Crisis Dims Economic Outlook

April 16, 2012

South Korea’s won fell for the first time in three days as concern Europe’s debt crisis will worsen sapped demand for riskier assets and the central bank cut its 2012 economic growth forecast. Government bonds rose.

The Kospi (KOSPI) Index of shares dropped 0.8 percent, following a decline in the Standard & Poor’s 500 Index, as the cost of insuring Spain’s bonds against default surged to a record last week. The Bank of Korea lowered its growth forecast today to 3.5 percent, from a December estimate of 3.7 percent. China, the biggest buyer of Korean exports, widened the yuan’s trading band in a step toward making its currency fully convertible.

“With Spain’s debt issue brought up again and Korea’s growth forecast lowered, there was increased dollar demand, especially among offshore investors,” said Kim Do Hee, a Seoul- based currency trader at Australia & New Zealand Banking Group.

The won fell 0.3 percent to close at 1,138.63 per dollar in Seoul, according to data compiled by Bloomberg. It touched 1,131.25 on April 13, a one-week high. One-month implied volatility for the won, a measure of exchange-rate swings used to price options, rose eight basis points, or 0.08 percentage point, to 8.65 percent.

The central bank lowered its 2012 inflation forecast to 3.2 percent from 3.3 percent. Next year, economic growth will likely accelerate to 4.2 percent while inflation will moderate to 3.1 percent, according to today’s statement. The current-account surplus is expected to narrow to $12.5 billion from $14.5 billion this year.

More Flexible Yuan

The People’s Bank of China now allows 1 percent moves from a daily fixing, after keeping the limit at 0.5 percent since May 2007. A more flexible yuan may help Governor Zhou Xiaochuan control inflation and support an economy that expanded in the first quarter at the slowest pace since mid-2009. The yuan has weakened 0.4 percent so far this year after strengthening 4.7 percent in 2011.

“We should consider possibilities for yuan weakening, not only strengthening, after the trading band expansion,” said Jung Kyung Parl, head of market analysis team at KEB Futures Co. in Seoul. “The decline in China’s reserves and yuan appreciation last year boosts the case for China to weaken the currency to support exports, which will limit won gains.”

The yield on South Korea’s 3.25 percent bonds due December 2014 dropped four basis points to 3.46 percent in Seoul, Korea Exchange Inc. prices show. That’s the lowest rate since February. Three-year debt futures rose 0.06 to 104.11 and the one-year interest-rate swap slid two basis points to 3.50 percent.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net

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


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