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Associated Press WorldStream via NewsEdge :

SEOUL, South Korea_South Korea’s benchmark stock index rose sharply Thursday following an interest rate cut by the U.S. Federal Reserve and a credit deal between the U.S. and South Korean central banks. The South Korean won surged against the dollar.

The Korea Composite Stock Price Index rose 27.59 points, or 2.9 percent, to 996.56 after about a half hour of trading, paring earlier gains of as much as 7.4 percent.

The won, meanwhile, rose 5.3 percent against the dollar, and at one point traded as much as 7.1 percent higher.

The South Korean currency has declined sharply this year as foreign investors sell stocks at a record pace and amid concerns over the health of South Korean banks amid the credit crisis.

Despite Thursday’s sharp early gain, the won was still nearly 31 percent lower against the dollar this year.

In Washington on Wednesday, the Fed reduced its target for the federal funds rate, the interest banks charge on overnight loans, to 1 percent from 1.5 percent, a move aimed at boosting the U.S. economy reeling from the global financial crisis.

It also announced jointly with the central banks of South Korea, Brazil, Mexico and Singapore that it will supply new lines of credit worth up to $30 billion to those institutions to help deal with the global credit crisis.

It is the latest in a series of “swap” arrangements where the Fed provides dollars for reserves of the other nations’ currencies.

The Fed said the new credit lines were designed “to help improve liquidity conditions in global financial markets” by increasing the global availability of U.S. dollars.

South Korean domestic banks have had difficulty during the liquidity crunch acquiring dollars needed to roll over loans taken out overseas.

The government and the Bank of Korea earlier this month announced a $100 billion plan to guarantee local banks’ foreign currency loans until the end of June next year.

“The Bank of Korea will provide U.S. dollar liquidity in Korea through competitive auction facilities to banks, established in Korea, using funds from the swap line,” it said in a statement.

The Fed had previously established reciprocal swap arrangements with the central banks of Australia, Canada, Denmark, England, Japan, New Zealand, Norway, Sweden, Switzerland and the European Central Bank.

<<Associated Press WorldStream — 10/31/08>>