An analysis by the Bank of Korea has found that the correlation between the won and the yuan has intensified since the launch of Trump's second administration. This is because both Korea and China are exposed to trade shocks due to the restructuring of global supply chains resulting from U.S. protectionism.

On the 16th, the Bank of Korea published a BOK issue note titled 'Background and Characteristics of Recent Correlation between the Won and the Yuan.' The report was authored by Vice Administrator Choi Moon-jeong and Director Jo Sang-heum from the Bank's International Finance Research Team, along with Directors Lee Jae-young and Oh Kyung-heon from the Foreign Exchange Market Team.

Bank of Korea panorama. The building that rises highest on the right side of the road in the middle is the new Bank of Korea. In front of it is the green-roofed building, the main building of the Bank of Korea, completed in 1912. Among the two buildings on the left, the rectangular building is the first annex, and the lower green-roofed building is the second annex.

According to the researchers, the correlation coefficient between the won and the yuan is the highest among 33 countries at 0.31. The gap with Chile, Malaysia, and South Africa, which have a strong correlation next to Korea (around 0.2), is significant.

However, there have been fluctuations over time. The correlation between the won and yuan has somewhat weakened since 2020, influenced by the U.S.-China trade conflict from 2018 to 2019, and the restructuring of global supply chains due to COVID-19 in 2020, which led to a reduced share of trade between Korea and China.

Indeed, the correlation coefficient before August 2000 was 0.36, but it later decreased to 0.21. However, the recent correlation coefficient has risen to a long-term average level. This is interpreted as a result of Korea's exports and imports with China reaching 19.5% and 22.1%, respectively, indicating an increase in trade and financial connections between the two countries.

The researchers concluded that the simultaneous weakening of both countries' currencies against the U.S. dollar, the competitive relationship in the global export market between Korea and China, and Korea's flexible exchange rate system are likely to heighten the correlation between their currencies. Additionally, both China and Korea are exposed to significant trade shocks due to strengthened protectionism under Trump's second administration, which will likely deepen the correlation.

The researchers said, 'In the future, the won is likely to be influenced by the trend of the yuan,' adding that it is essential to closely monitor the yuan's movements while keeping an eye on the developments of the U.S.-China trade conflict.

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