Bloomberg News

Won Completes Worst Week in Four Months on Fed Taper; Bonds Rise

December 20, 2013

South Korea’s won completed its worst week in more than four months on bets the Federal Reserve will continue to trim stimulus that has spurred inflows into emerging markets. Government bonds rose.

The Fed will taper its bond buying in $10 billion increments over the next seven meetings before ending the program in December 2014, according to a survey 41 economists polled by Bloomberg a day after the authority said it will cut monthly purchases to $75 billion in January from $85 billion. The Fed is likely to raise rates “very gradually” and the stimulus reduction will probably continue step by step, Bank of Korea Governor Kim Choong Soo said at a meeting today.

The won slid 0.8 percent this week to close at 1,061.2 per dollar in Seoul, the biggest decline since the period ended Aug. 2, data compiled by Bloomberg show. The currency fell 0.1 percent today. Overseas investors bought more local stocks than they sold for a second day, exchange data show.

“It remains to be seen whether foreign investors will continue buying Korean stocks and bonds,” Jeon Seung Ji, a currency analyst at Samsung Futures Inc. in Seoul, wrote in a research note today. “Market volatility can rise on uncertainties regarding the timing and size of further tapering.”

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 38 basis points, or 0.38 percentage point, this week and 34 basis points today to 6.18 percent, data compiled by Bloomberg show.

‘Measured Reduction’

Fed Chairman Ben S. Bernanke said after the Dec. 17-18 policy meeting that, should job gains continue and inflation increase, “I imagine we’ll continue to do, probably at each meeting, a measured reduction” in asset buying. The U.S. central bank said its benchmark interest rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.

Bank of Korea will act proactively to ensure price and financial stability when external conditions change, Governor Kim told reporters yesterday. South Korea must be swift and smart in coping with changes as the world economy will enter a new paradigm next year with the Fed tapering stimulus, he said.

The yield on the 3 percent sovereign notes due December 2016 fell eight basis points this week and one basis point today to 2.88 percent, according to Korea Exchange Inc. prices.

To contact the reporter on this story: Yewon Kang in Seoul at ykang51@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net


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