SEOUL (Dow Jones)--The South Korean won rose to a five-week high against the U.S. dollar late Tuesday, buoyed by hopes that European leaders will unveil a euro-zone rescue package when they meet on Wednesday.
Investors took risk-on trades following news on Monday that Europe's leaders may have agreed on a plan to boost the European Financial Stability Facility bailout fund to more than EUR1 trillion, while comments on the same day from Federal Reserve Bank of New York President William Dudley that the Fed could launch another round of quantitative easing added to weight on the dollar.
The U.S. unit fell to as low as KRW1,124.50--its lowest since it touched KRW1,114.00 on Sept. 19--during the session, though its losses were later trimmed as investors grew cautious before Wednesday's European Union summit, dealers said.
Considering the improvement in risk appetite, "policy makers in the euro zone seem to have successfully turned market sentiment positive," said a Seoul-based trader at a foreign bank.
The market is likely to continue being driven by euro-zone events for a while, the trader added, forecasting that "if the euro rises above $1.40, the dollar will likely fall below KRW1,120. If the euro falls below $1.38, the dollar will also rise."
Korea government bonds ended flat despite early gains in prices, as investors stayed cautious before Wednesday's EU summit.
"Bonds prices rose in the morning on the back of bargain buying, but some investors seem to have sold off their buys since," said Kwon Han-wook, a fixed-income analyst at Kyobo Securities. "Many in the market are reluctant to carry their positions overnight due to uncertainties regarding the euro-zone debt issue." Foreign investors' continued selling in bond futures also weighed on the overall bond-market sentiment, he added.
Depending on the outcome of Wednesday's EU meeting and global financial markets' reaction to it, the local bond market could become volatile again later this week, but bargain-buying opportunities are expected to provide support to prices, Kwon said.
He tipped the three-year yield to move in a 3.35%-3.55% range for the rest of the week.
December bond futures ended flat at 103.91. Foreigners were net sellers of futures for a third consecutive session, selling 2,295 contracts Tuesday.
-By Jieun Shin, Dow Jones Newswires; 822-3700-1905; jieun.shin@dowjones.com
