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Strategies & Market Trends : Korea

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From: Paul Kern10/6/2008 11:46:24 PM
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Korean Won Falls to 7-Year Low; Government Says to Use Reserves

By Kim Kyoungwha and Seyoon Kim

Oct. 7 (Bloomberg) -- South Korea's won slumped, touching the lowest level since 2001, even as the government said it will use its foreign-exchange reserves to provide funds to the local financial system.

The currency, Asia's worst performer this year, tumbled as much as 7 percent, the most since December 1997 when the nation sought an emergency loan from the International Monetary Fund to meet debt payments. The government will use its currency reserves, the world's sixth-largest, to provide funds when needed, Deputy Finance Minister Shin Je Yoon said today.

``The government should try to ease the won's drastic drop, to calm investors, with its ample reserves,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. ``South Korea is much sounder in terms of economic fundamentals than it was during the 1997-1998 financial crisis.''

The won, the worst performing major currency, is now down 30 percent this year. Investors are concerned the deepening global credit crunch is creating a funding shortage for the nation's banks, exporters and manufacturers, eroding confidence and threatening the economic outlook.

South Korea has been building up its foreign currency reserves since Asia's financial crisis struck the region a decade ago. Those reserves fell for a fifth month in August to $243.2 billion, according to the central bank, as policy makers intervened to stem the won's slide.

Investors shouldn't overreact as the government can cope with the global financial turmoil, said Rhee Chang Yong, vice chairman of South Korea's financial regulator. The government is preparing ``various'' measures in response, he said at a meeting today in Seoul.

`Clearly Different'

``The deteriorating overseas borrowing situation is mainly due to the global credit crunch,'' Rhee said. ``The situation is clearly different from the financial crisis'' in 1997.

The won tumbled 5.5 percent to 1,338.75 per dollar as of 12:06 p.m. local time, according to Seoul Money Brokerage Services Ltd. The currency touched a low of 1,364.05 today, the weakest since April 2001.

Korea's Kospi stock index fell 1 percent today, and is down 29 percent this year, headed for its first annual loss since 2002. Investors overseas sold more of the country's shares then they purchased on all but 15 days since May as the financial turmoil prompted investors to exit emerging-market assets. Eight of the 10 most-traded Asian currencies weakened this year.

``Sentiment is extremely unstable as the crisis seems to be spreading fast,'' said Jay Won, a currency dealer at Korea Exchange Bank in Seoul. ``People are panicking and they only want to hold dollars.''

Stabilize Currency

The government's priority is to stabilize the currency, Finance Minister Kang Man Soo said yesterday. Traders said the central bank yesterday intervened in the market after the currency slumped as much as 5.6 percent.

Kang yesterday urged banks to sell overseas assets to raise cash they can use to lend to local companies struggling with rising offshore borrowing costs. Lack of access to funds makes it harder for companies to pay wages and buy raw materials.

``This is not typically a fundamental problem,'' said Mirza Baig, a currency strategist in Singapore at Deutsche Bank AG, the world's top currency trader. ``But when you are in the middle of a crisis, it does become a fundamental problem because nobody is prepared to refinance your maturing loans.''

Bonds Fall

Korea's government bonds fell on speculation policy makers will ease their monetary stance after a local newspaper reported the central bank may cut the reserve requirements for banks to help increase liquidity in the market.

The central bank may reduce the reserve ratio requirement and increase lending via repurchase agreements, the Korean- language Seoul Economic Daily reported, citing a government official it didn't identify.

Bank of Korea Governor Lee Seong Tae and fellow policy makers meet Oct. 9 to review interest rates. The bank kept its benchmark rate at an eight-year high of 5.25 percent last month.

The yield on the 5.5 percent note due June 2011 fell 4 basis points to 5.72 percent, according to Korea Exchange. The price rose 0.11, or 118 won per 10,000 won face amount, to 101.25. A basis point is 0.01 percentage point.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Seyoon Kim in Seoul at skim7@bloomberg.net.
Last Updated: October 6, 2008 23:09 EDT
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