Currency, bond markets suffer choppy trading on surprise

The South Korean won closed nearly flat against the U.S. dollar Thursday after a choppy session and state bonds erased much of their earlier gains after the country's central bank unexpectedly slashed its policy rate to an all-time low.

The local currency closed at 1,126.40 per dollar, down 0.1 won from the previous session, snapping a three-day losing streak. The won dipped to as low as 1,136.40 won at one point immediately after the rate cut, but pared earlier losses as recent declines were excessive.

Yields on state bonds tumbled right after the rate reduction but erased earlier gains to close mixed as market players raised doubt over an additional rate cut down the road.

The yield on benchmark three-year Treasurys stood at a record low of 1.896 percent, down 1.1 basis points, while that on five-year Treasurys rose 1.2 basis points to 2.021 percent.

"Expectations about a rate cut in South Korea and a rise in borrowing costs have been priced in, but the won-dollar rate may come under growing pressure to creep up," said Lee Dae-ho, an analyst at Hyundai Futures Co.

The Bank of Korea (BOK) unexpectedly lowered its base rate by a quarter percentage point to an all-time low of 1.75 percent in an apparent move to prevent Asia's fourth-largest economy from falling into deflation and lend support to sagging growth momentum.

The central bank lowered the rate by a total of 50 basis points in two rounds in 2014.

Fourteen of the 18 analysts surveyed by Yonhap Infomax, the financial news arm of Yonhap News Agency, had projected the central bank would keep the base rate unchanged.

There have been growing calls for the BOK to cut borrowing cost as the economy is losing its growth momentum amid rising household debts and flagging domestic consumption.

The Korean won had been under downward pressure on increasing divergence in U.S. monetary policy compared with the rest of the world.

This week, the won has been losing ground against the greenback as traders bet that the U.S. Federal Reserve would raise interest rates sooner than thought and weak growth data for the fourth-quarter stoked speculation that the Japanese central bank may take additional monetary easing.

South Korea's won usually tends to move in lockstep with the yen as the two countries directly compete in overseas markets over products ranging from autos to smartphones.

The country's key stock index, the KOSPI, shed 10.24 points, or 0.52 percent to 1,970.59, extending its loss to a fourth consecutive day.

Meanwhile, the won-yen cross rate stood at 930.30 as of 5:08 p.m. (Yonhap)