Korean won strengthens as inflation at 16-year low boosts hope of rate cut

South Korean won strengthened on Wednesday as continued decline in the inflation index increased expectations of additional monetary stimulus by the authorities.

USD/KRW fell to 1104.08 from the previous close of 1108.99. On Tuesday, the pair had touched an 8-day high of 1113.40, and it has distanced further off the 20-month high of 1139 touched on 16 March.

South Korea's annual inflation rate slipped to 0.4% in March, its lowest since July 1999, after rising 0.5% in February, as cost of transport, recreation and culture and utilities weighed.

Traders said the Bank of Korea is now more likely to cut rates further as the 16-year low in inflation would support such a move.

Another data showed that trade surplus of Korea has widened to $8.4bn (£5.7bn €7.8bn) from $6.1bn while the market had been expecting $7.7bn of surplus.

However, the HSBC manufacturing dropped to the contraction zone, underpinning the case for further policy easing.

The HSBC index slipped to 49.2 from 51.1 while the consensus was for an increase to 51.50.

"The latest HSBC PMI data signalled a general worsening in operating conditions in the South Korean manufacturing sector," said Amy Brownbill, economist at Markit.

"Production declined, having expanded in February at the fastest pace since April 2013. This was underpinned by a fall in new orders, with the rate of decline the fastest in over one-and-a- half-years," Brownbill said.

The Bank of Korea had unexpectedly slashed the benchmark Base Rate by 25 basis points to a record low of 1.75% citing downside risks to inflation on 12 March, sending the won to a 20-month low.