SEOUL (Dow Jones)--The South Korean won slipped to its lowest level in more than a week against the U.S. dollar Friday as the outcome of a European Union summit weighed on risk sentiment, and after the European Central Bank Thursday went against market expectations by not announcing more aggressive euro-zone bond buying.
During the local session, the E.U.'s 27 member states failed to agree to E.U. treaty changes spurring risk-off dollar buying, though several optimistic comments by E.U. leaders, including German Chancellor Angela Merkel, capped the dollar's upside. Merkel said the 17 euro-zone countries have reached a deal for a "fiscal union" to control budgets.
Traders said negative reaction to the summit outcome as well as dollar-buying from offshore market participants--likely the repatriation of funds from local bond investment--gave the greenback firm support throughout the session. The dollar rose as far as KRW1,148.40, its highest since touching KRW1,156.60 on Nov. 29.
"There wasn't much expectation for all 27 members to agree on a pact to tighten national fiscal policies. An agreement among the 17 euro-zone members still looks significant," said a senior trader at a foreign bank in Seoul.
"But it's the uncertainty that makes the local currency vulnerable. I expect support for the dollar to stay firm," the trader said, projecting resistance at KRW1,160.
Korean government bonds were flat late Friday with a lack of direction-tipping leads after the Bank of Korea left its benchmark interest rate unchanged at 3.25% for the sixth consecutive month Thursday.
On Friday, the BOK released a report in which it lowered its 2012 economic growth forecast for the country to 3.7% from 4.6%, citing the impact of the euro zone's sovereign debt crisis. But market reaction to the report was largely muted as investors focused on the E.U. summit that ends later Friday, said a trader at a local bank.
Though the BOK forecasts greater downside risk in the domestic economy next year, there won't likely be a bond market rally in the near term as yields are already close to the benchmark rate, traders said.
Analysts tip the three-year yield to move in a range of 3.30% to 3.50% for the rest of the year.
December bond futures ended four ticks higher at 104.50.
-By Jieun Shin, Dow Jones Newswires; 822-3700-1905; jieun.shin@dowjones.com
