The South Korean currency has continued to increase in value against the US dollar following the Government's decision to allow the won to float freely.

The won's sudden surge against the dollar fuelled another buying spree on the stock market, pushing the composite index 4.78% higher to 404.26 by close.

The won closed at 1,425, sharply higher than Monday's close of 1,563.9.

The market suffered dramatic falls last week amid fears the country would not be able to meet payments on its short-term debts.

However, the Government took advantage of a strong surge on Monday to scrap restrictions that prevented the won from fluctuating more than 10% against the dollar.

Brief respite for South Korean Prime Minister Koh Kun

The gamble appears to have paid off, at least in the short term, with the won regaining lost ground against the dollar for a second day.

Traders said the float would enable the currency to find its true market value. The limits helped paralyse the market last week, with companies and banks scrambling to acquire dollars.

The Bank of Korea has also intervened in support of the won after the Government said the currency had become under-valued. It is unclear whether the rebound amounts to more than a temporary respite.

"The lifting of the trading band seems to have scared off speculators for the moment," said a domestic bank dealer. "But it could magnify the market's volatility if signs of trouble in dollar inflows resurfaced."

Doubts remain about South Korea's ability to pay back its short-term debts, estimated at $20bn by the end of the year.

Analysts and brokers are still concerned about economic restructuring fearing that more companies might go bankrupt.

Seoul still has a long way to go to fix its broken economy

"Plenty of hurdles lie ahead," said a South Korean analyst. "We will see more companies go under next year. Investors have a lot of reasons to be careful."

Brokers said the market would lose much of its upbeat mood because of the country's presidential election on Thursday.

Two of the candidates reversed their earlier positions and said they would now abide by an agreement for structural reform with the International Monetary Fund if elected.

But critics say that none of the candidates have shown a clear grasp of the financial crisis or a coherent strategy for recovery.

The election campaign has been marked by bitter personal attacks and factional in-fighting, with no clear-cut debate over economic policy.
 

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