South Korea's president told the new central bank chief on Wednesday to co-ordinate with other countries in unwinding stimulus policy, reinforcing investors' view that interest rates will stay low for a few more months. Bond futures extended gains on the news as traders read it as suggesting that the government does not want the Bank of Korea to raise interest rates before other big central banks, such as the US Federal Reserve, start raising theirs.
The president's selection late on Wednesday of a "cheap won" advocate as chief economic secretary reinforced the market's interest rate expectations as the government will likely pursue a policy aimed at keeping credit costs and currency value low. "Countries should co-ordinate with each other over exit strategy," a presidential office statement quoted President Lee Myung-bak as saying after awarding Kim Choong-soo the letter of appointment as the Governor of the Bank of Korea. Kim, who will start work on Thursday, agreed.
June treasury bond futures extended gains after their remarks, although cutting much of the day's gains by the close as government data showed industrial output in February expanded much faster from January than the market had expected. "Remarks from the government (on the interest rate policy) have become more important than before as the government is now widely seen as dominating over the central bank," said Park Sang-hyun, chief economist at HI Investment & Securities. Analysts say the return of Choi Jung-kyung, who was part of a big won-selling intervention in 2003-2004, could lead to more frequent and stronger government intervention in the currency market to cap the won's strength.
The won finished the first quarter higher against the dollar, marking the fourth quarterly gain in a row and approaching a 1-1/2-year high of 1,117.5 per dollar set in early January. It last traded at 1,131.3. There is no official data on how much of won the government dumped to keep the currency cheap in 2003/2004, but South Korean media and traders estimate the government had sold far more than 10 trillion won ($8.8 billion).
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