Won drops to 1305.3 against dollar; exchange rate hits 28-month high

With bond interest rates rising sharply due to a lower-than-expected cut in interest rates by the U.S.

Federal Reserve Board and inflationary pressure from the won’s ongoing depreciation, capital markets remained unstable Wednesday. On the Seoul foreign exchange market, the won closed at 1,305.3 won to the dollar Wednesday, up 9.4 won from the previous day.

This was its highest level since Nov. 16, 1998, when the Korean currency hit 1,316.3 won to the dollar. On the back of volume supply by state policy banks, the won opened the day 1,293 won, up 2.9 won from a day earlier. It climbed to 1,306.0 won at one point during the day due to the weakening of the Japanese currency to 123.40 yen to the dollar. Foreign exchange authorities made several verbal interventions but investors ignored them.

An official at the Bank of Korea said the yen was continuing to slide despite government attempts to boost the economy due to the prospect that the Japanese economy may be unable to emerge from its slump for the time being. Foreign exchange dealers forecast that the yen’s fall would continue. But pointing to the scheduled arrival of $1 billion in foreign direct investment by the end of this month, they said the won-dollar exchange rate could drop somewhat based on the future movement of the yen.

Meanwhile, on the bond market, interest rates of three-year-maturity national bonds reached 5.71 percent Wednesday, up 0.08 percentage points from the previous day, while corporate bonds with a three-year maturity closed at an annual rate of 7.17 percent, up 0.10 percentage points from a day earlier.

Park Hyeon-Jin witness@donga.com