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Korea's highly open financial market and economy could experience heightened volatility, amplified by the potential reclaimed victory of former U.S. President Donald Trump in the November election, market watchers said Monday.

Central to the concern is "Trumpflation," a portmanteau of Trump and inflation. It refers to the increase in the prices of goods and services sparked by the fiscally conservative, protectionist policies long embraced by the former U.S. leader.

His three key drives, tax cuts without emphasis on austerity needs, higher tariffs and stricter immigration curbs, will sustain elevated inflation. A "higher-for-longer" approach by the U.S. Federal Reserve is likely to stall monetary easing of Bank of Korea (BOK). Stricter immigration policies will decrease the availability of low-cost labor, exacerbating price pressures through higher wages for employers.

Most pronounced will be fluctuations in the Korean currency relative to the world's top reserve currency.

Bank of Korea Governor Rhee Chang-yong / Yonhap

Uncertainty

"The financial market is on course for turbulence to a varying degree depending on the shock factors," Hyundai Research Institute senior researcher Ju Won said.

Disinflation, a slowing pace of inflation, is not at all compatible with the combination of higher tariffs, low borrowing rates, greater fiscal spending and a weak U.S. dollar, in his view.

"Views differ, but the policies outlined thus far are geared more toward underpinning a stronger dollar. Whether and by how much the envisioned policies are implemented will determine the market conditions, among other unexpected changes in the wider global sphere."

The prospect of greater fiscal spending under Trump led many to expect an uptick in the U.S. Treasury bonds issued. This in turn sends the long-term yields higher. Many say Korea's Treasury bonds yields could simultaneously track up.

Currency

Trump said the strong U.S. dollar hurts the competitiveness of U.S. exports, Wednesday, in an apparent reference to the weakness of the Japanese yen and the Chinese yuan.

A Trump victory could, therefore, mean a government-intervened weakened U.S. dollar and the corresponding appreciation of the two currencies. Korea's won, almost always moving in sync with the two, will trade higher.

More probable, however, is the extended reign of the strong U.S. dollar, as indicated by the high tariff drive.

Higher tariffs will push up the import prices in the U.S., sending inflation higher. This will push back the timing of the Fed rate easing, leading to a strong dollar underpinned by the sustained high key benchmark rates.

The remarks led to the Japanese currency registering a four-week high of 157 yen against the U.S. dollar.

The figure was a continued gain from the week before. The extended depreciation of Japanese yen snapped out of its 38-year lows to the upside, July 11, to 158.21 yen against the U.S. dollar. The 3 percent increase from the previous session was the largest intraday gain since late 2022.

Gold, a hedge against inflation, is rallying on the back of the Trumpflation concerns.

Gold futures for August delivery traded at $2,444.3 per ounce on Thursday. It was a slight decline from the previous session's $2,488.4, an all-time high and a 26 percent year-on-year jump.