Korean Won Gains as Economic Stimulus Plan Unveiled; Bonds Fall

Korean Won Gains as Economic Stimulus Plan Unveiled; Bonds Fall

By Kim Kyoungwha

Nov. 3 (Bloomberg) -- South Korea's won rose, extending the biggest weekly gain in a decade, as the government unveiled a 14 trillion won ($11 billion) stimulus plan to prevent the economy from slipping into a recession. Bonds fell.

The currency strengthened as the Kospi stock index soared as much as 4.1 percent after President Lee Myung Bak pledged to achieve an economic growth rate of more than 4 percent next year with the help of policies to stimulate consumer demand as exports slow. The government will raise the ceiling for foreign- exchange funds used to stabilize the currency market to 20.6 trillion won next year, the finance ministry said.

``Demand for the won firmed up as the government announced a stimulus package,'' said Ko Yun Jin, a currency dealer in Seoul with Kookmin Bank, the nation's biggest lender. ``Investors and traders are soothed by reassurances and determination from policy makers that they will stabilize the financial markets.''

The won jumped 2.3 percent to 1,262 per dollar at the 3 p.m. close in Seoul, according to Seoul Money Brokerage Services Ltd. It traded between 1,257 and 1,313 today. The currency soared 10 percent last week, the most since January 1998.

The government will spend 3.4 trillion won to help smaller companies and farmers, and provide 1.3 trillion won to boost the labor market and aid low-income earners, the finance ministry said today in Gwacheon. It will extend tax breaks for companies investing in factories by one year.

The biggest rout in Asian currencies since the crisis in 1997 is tempting investors to buy in the region that still enjoys the world's fastest economic growth and $4 trillion of reserves.

Asian Currency Picks

Franklin Templeton Investments, which manages about $500 billion, favors the Malaysian ringgit and China's yuan. Sydbank A/S, Denmark's third-largest bank, is buying the South Korean won, Indonesian rupiah and Indian rupee. Goldman Sachs Group Inc. said last week that the won, Asia's worst-performer this year after falling 28 percent against the dollar, may gain 12 percent the next six months.

``Now is the time that we have to take good care of the real economy,'' President Lee said. ``We can't blame the world economy. To achieve our 4 percent-level growth, companies should do their utmost, but considering worsening exports, we should implement policies to revive domestic demand.''

Exports, which make up more than half of South Korea's gross domestic product, rose 10 percent from a year earlier in October, the smallest increase in more than a year, the government reported today. The economy expanded 0.6 percent in the third quarter from the second, the slowest pace in four years, official figures show.

`Still Negative'

``I see a 50 percent chance of a technical recession,'' meaning two straight quarters of negative growth, said Dariusz Kowalczyk, a strategist with CFC Seymour Ltd. in Hong Kong. ``I'm still negative on the won and still expect it to fall to 1,600 by year-end.''

Korea's local-currency bonds fell for a second day as the government's auction of three-year notes drew less demand than the previous sale.

It sold 1.88 trillion won of the securities at an average yield of 4.6 percent, the ministry said. Investors submitted total bids of 2.08 trillion won, or 1.07 times the 1.95 trillion won of debt offered, the ministry said on its Web site. An Oct. 6 auction attracted bids for 1.2 times.

The yield on the 5.5 percent note due June 2011 climbed 22 basis points, or 0.22 percentage point, to 4.66 percent. The price of the security fell 0.54, or 54 won per 10,000 won face amount, to 104.23.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.

Last Updated: November 3, 2008 01:23 EST

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