South Korea won erases 2011 gains to hit 6-month low

SEOUL: The South Korean won lost more than 2 percent against the dollar on Monday, wiping out this year's gains on market talk of foreign funds' withdrawal from local debt markets after key bond yields dropped to multi-year lows.

Treasury bond futures nosedived in afternoon trade, reversing their initial advance and scoring their worst daily loss in six months.

Foreign investors unloaded a net 356 billion won in treasury futures ahead of maturity of their September contract on Tuesday. Their net selling totalled almost 1 trillion won in three days to Monday.

"We don't know what will happen if Greece defaults," said a local bank dealer. "We need to watch out for now."

The won finished domestic trade at 1,137.0 per dollar. It plunged to as low as 1,141.0 just before the close, the weakest reading since Mar. 17.

Dealers suspected dollar-selling intervention at the 1,120 level, but said the amount was negligible.

Technical indicators show the dollar/won pair has been overbought since last Wednesday, with the 14-day Relative Strength Index above the overbought mark of 70.

"In terms of the charts, 1,120 is an important level and we expected the authorities might come to defend it," said a foreign bank FX dealer.

"But the authorities appeared to retreat, which might be because of heavy (dollar) buying from offshore players. Exporters were in a wait-and see mode overall."

Foreign investors were buyers of Seoul shares worth just a net 5.0 billion won.

They have continued to redeem funds from emerging Asian markets in the past few weeks, with the South Korea and Taiwan stock markets among the hardest hit by foreign fund outflows last week, according to a note from Citi.

The won also tumbled to the lowest in two and a half years against the Japanese yen, with the yen/won rate rising to as high as 14.8265.

Finance Minister Bahk Jae-wan told an annual parliamentary audit that the government did not have a policy of preferring to keep the dollar/won rate high but made no market-moving comments during market hours.

The audit of the National Assembly will continue on Tuesday with focus on taxation issues, with investors awaiting fresh stimulus measures from the US Fed meeting this week.

The September contract on three-year treasury futures dropped 0.45 points, its biggest one-day drop since March.

Long-dated bonds continued to lead yield gains, with the yield on the five-year Treasury bond up 13 basis points to close at 3.61 percent. It has gained 21 bps from its multi-year low touched last week.

The yield on the 10-year treasury bonds ended up 11 bps to 3.79 percent, after the monthly auction for the same-maturity note worth 1.6 trillion won settled at an average yield of 3.69 percent.

Copyright Reuters, 2011