Bank of Korea Governor Rhee Chang-yong / Yonhap

The Korean currency could keep strengthening with the won-dollar exchange rate potentially dropping below 1,300 won against the greenback, supported by its correlation with the Japanese and Chinese currencies, market watchers said Monday.

Underpinning the optimism China's stimulus package and the slowing pace of inflation in the U.S. The former is correlated with the appreciation of the yuan, while the latter with the depreciation of the U.S. dollar, tied closely to the Federal Reserve's accommodative monetary policy.

Many believe that the further strengthening of the Korean currency will largely depend on the extent of China's economic recovery and the monetary easing by the Bank of Japan.

"The won could appreciate to around 1,300 won if the yuan gains further," a Shinhan Securities report said.

"The globally weakening U.S. dollar may experience a slight rebound, in which case the won could fall below 1,304. The trajectory of the yuan will need to be closely monitored."

The won-yuan connection is attributed to Korea's significant dependence on China for export growth, as many foreign investors increasingly view Korea as an alternative investment destination to China.

"The Korean won could be capped at the 1,304 won-level, as indicated by the recent dollar-won exchange rate movements in New York. Overall, this figure is likely to maintain upward momentum, reflecting concerns over a potential U.S. economic slowdown and the ongoing easing cycle."

The U.S. dollar can register a sharp short-term rebound, driven by excessive market anticipation of a U.S. easing, coupled with the upcoming presidential election in November, according to Kiwoom Securities researcher Kim Yu-mi.

"The foreign exchange and equity markets will fluctuate in the weeks to come, defined by high uncertainty until the November election," she said.

"The U.S. presidential election is expected to act more as a factor stifling the positive effects of monetary easing than a trigger for a market crash."

According to foreign currency exchange market data, the won traded at 1,310.60 won against the U.S. dollar around 9 a.m. on Monday. This was slightly weaker than the 1,307 won against the dollar in the early hours of Saturday. However, it remained significantly stronger than the approximately 1,390 won recorded in early to mid-June.

The won had plunged to lower than 1,400 won per dollar on April 16, buffeted by the escalating conflict in the Middle East.

The won's depreciation to a 17-month low, breaking the significant 1,400 won barrier, unsettled many, since two of the three previous occurrences were linked to full-blown economic crises.

The currency traded at 1,307.8 won against the dollar as of 3:30 p.m., Monday.