Following the Yen, Won Sinks to 1,299

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Following the Yen, Won Sinks to 1,299


The Korean won plunged to 1,299.20 against the U.S. Monday, threatening to aggravate inflationary pressures and to raise bond yields. In early afternoon trading, the won value weakened to the 1,300 level, for the first time since Nov. 18, 1998.

If the won's value falls against the dollar by 10 percent, consumer prices will rise by 1.5 to 1.7 percentage points due to the increased cost of imported goods, according to the Bank of Korea. "This was far lower than our expectation and it is making it difficult to achieve our goal of limiting core inflation this year to 3 percent," said Lee Sung-tae, senior official at the central bank.

Oil and gas prices in Korea have been rising day by day, despite stabilized international petroleum prices. Imported fruits, too, have been sharply higher.

In the bond market, yields on state and corporate bonds with maturities of three years rose by four basis points Monday, ending at 5.64 percent and 7.06 percent, respectively.

"If the won value falls against the dollar, then inflationary pressure builds up in the country," said Kim Byung-chul, senior analyst from Tongyang Securities Co. "As a result, the demand for bonds will drop as investors search for high-yielding investments. Also the fact that the central bank is unlikely to lower its overnight call rate next month is another negative factor affecting the bond market."

Financial authorities do not plan to intervene on the foreign exchange market yet. "The won's sharp fall against the dollar is solely due to weakening yen value against the dollar," said Lee Jae-wook from the central bank. "The falling won is not caused by speculative trading or shortage of dollar supplies on the market," he said.

But if the yen's value falls faster than the won's against the dollar, then the government is likely to intervene to help domestic exporters maintain their global price competitiveness.





by Cheong Chul-gun / Oh Jung-hee

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