SEOUL: The South Korean won extended its decline further against the dollar on Wednesday, retreating from a 32-month high touched earlier on the week on caution about the heightened move by the government to contain volatile capital flows.
Investor appetite for safer assets also grew ahead of a national holiday on Thursday, bracing for possible retaliation from al Qaeda after its leader Osama bin Laden was killed in a US Special Forces assault.
The won ended local trade at 1,074.9 per dollar, compared with Tuesday's finish at 1,068.8, as the Seoul stock market fell from all-time highs.
On Monday, the local currency strengthened to as much as 1,064.9, the highest since late August 2008.
After Tuesday's market close, a joint statement from the finance ministry, the Bank of Korea and a regulator said they would include two more banks in the ongoing investigation and to extend the period of the probe.
The announcement raised investor attention to the broader-based probe, although Finance Minister Yoon Jeung-hyun told Reuters on Tuesday the government was not considering imposing restrictions on non-deliverable forward (NDF) currency trades "as of now".
The country has been looking into foreign exchange derivative trades, including NDF transactions, at local branches of two foreign banks and two domestic lenders since last week, alarmed by a surge in short-term foreign debt in the first quarter.
The results are expected within this month, a finance ministry official said.
"The first probe will mostly look at forward currency trades and the second one will likely target Kimchi bonds," he told Reuters, in reference to banks' underwriting of foreign-currency debts issued by local companies at home.
Issuance in dollars is cheaper and the proceeds are eventually converted into the won, which also has contributed to the sharp rise in short-term foreign borrowings.
Bonds remained in a narrow range for a third straight session after having priced in a 25 basis-point hike at the Bank of Korea's rate meeting next week.
"There is caution against an interest rate hike, but no heavy selling will be likely on the view that the speed of the next rate hikes could be limited," said a local brokerage trader.
The yield on 3-year treasury bonds edged up one basis point to 3.79 percent and the 5-year treasury yield also added one bp to 4.10 percent.
Separately, South Korea is preparing to allocate part of its $307 billion in foreign exchange reserves to yuan-denominated assets in an effort to diversify its increasing reserves, officials from the central bank and the finance ministry said.
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