The South Korean won hit a fresh 20-month low against the U.S. dollar and state bonds continued to build up gains Friday after the country's central bank unexpectedly slashed its policy rate to an all-time low.

The local currency finished at 1,128.50 per dollar, down 2.1 won from the previous session's end and the lowest since July 10, 2013, when it ended at 1,135.80 won.

Yields on state bonds continued to rally on speculation that another rate cut may be in the offing.

The yield on benchmark three-year Treasurys stood at a fresh record low of 1.869 percent, down 2.7 basis points, while that on five-year Treasurys fell 0.8 basis point to the lowest level of 2.013 percent.

Analysts said the won's decline accelerated from growing divergence in global monetary easing. While the U.S. Federal Reserve is widely expected to start a rate hike in the second half of the year, other central banks around the world are set to take additional easing steps to buttress their economies.

"The won is trailing the Japanese yen's move against the dollar, and the won-dollar rate will further rise on increased bets on a Fed rate hike," said Kim Moon-il, an analyst at Eugene Investment & Securities Co.

On Thursday, 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.

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

The country's key stock index, the KOSPI, rose 15.2 points, or 0.77 percent, to 1,985.79, snapping its four-day losing streak.

Meanwhile, the won-yen cross rate stood at 929.01 as of 4:08 p.m. (Yonhap)