Korean Won Near Four-Month Low on North Korea Threat; Bonds Gain

By Seyoon Kim 

The won closed within 0.7 percent of a four-month low in Seoul after North Korean leader Kim Jong Un urged the military to boost readiness against the U.S., heightening tensions. Government bonds rose.

On a visit to a long-range artillery unit on the frontline, Kim said he’s confident the North’s armed forces could set a “sea of fire” on a South Korean island, the communist nation’s Korean Central News Agency reported. The won weakened as overseas investors sold more Korean stocks than they bought after the North threatened a preemptive nuclear strike and South Korea and the U.S. began annual war games yesterday.

“Concerns about North Korea’s threats are keeping the currency weak, while foreign funds are selling more South Korean stocks,” said Hong Seok Chan, an analyst at Daishin Economic Research Institute in Seoul. “Some investors, including exporters, are looking to sell dollars around the 1,100 level.”

The won closed at 1,095.26 per dollar in Seoul, little changed from 1,095 yesterday, according to data compiled by Bloomberg. The currency yesterday touched 1,102.65, the strongest level since October. One-month implied volatility for the won, a measure of expected moves in the exchange rate used to price options, dropped nine basis points, or 0.09 percentage point, to 7.76 percent.

Tensions on the Korean peninsula are the highest since at least 2010, when 50 South Koreans were killed in attacks by the North. The totalitarian state has increased its rhetoric since the United Nations Security Council tightened sanctions to punish North Korea for a nuclear weapons test in February. The North’s threats of preemptive nuclear strikes are “hyperbolic,” U.S. National Security Adviser Thomas Donilon said yesterday at the Asia Society in New York.

Borrowing Costs

Global investors cut their holdings of shares included in the Kospi Index by some 375 billion won ($342 million) in the past four trading days, exchange data show.

Bonds gained as analysts predict the central bank will leave interest rates unchanged this week. The yield on the 2.75 percent bonds due September 2017 fell three basis points to 2.76 percent, according to prices from Korea Exchange Inc.

The Bank of Korea is likely to leave its policy interest rate unchanged at 2.75 percent on March 14 and for the rest of this year, Kwon Young Sun, a Hong Kong-based economist at Nomura International Ltd. wrote in a research note today. Twelve out of 16 economists surveyed by Bloomberg predicted the central bank will keep the benchmark rate steady at a March 14 meeting. Four forecast a 25 basis point cut. The bank last lowered borrowing costs in October.

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

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