A trader looks at the screen displaying foreign exchange transactions on the trading floor of Hana Bank headquarters in Seoul, Thursday. Yonhap

The Korean currency plunged to below 1,400 won against the U.S. dollar, prompted by the election victory of U.S. President Donald Trump, market watchers said Thursday.

The Korean won traded at a seven-month low of 1,400.5 against the U.S. dollar around 9 a.m., a slight improvement from the overnight low of 1,404 won in early morning trading. The previous breach of the psychologically significant 1,400 won barrier occurred on April 16, buffeted by the then-escalating conflict in the Middle East.

Central to this development is the widespread expectation of higher inflation, sparked by the rise in prices of goods and services due to the fiscally conservative, protectionist policies long championed by the former U.S. leader.

Inflation will likely stay elevated due to his three key policy drives: tax cuts, higher tariffs and stricter immigration curbs.

This in turn will slow the pace of monetary easing by the U.S. Federal Reserve (Fed), a step the Bank of Korea (BOK) is likely to follow. Higher tariffs will raise the prices of imported items. Tighter immigration policies will make low-cost labor more scarce, translating into higher wages for employers. Tax cuts will lead to more U.S. Treasurys being issued to offset its deficit, fueling inflation. The Fed will then likely delay the timeline of easing, appreciating its currency in the process. The Korean currency will weaken as a result.

Some say the won could plummet further to 1,420 won against the dollar before year's end.

"The Korean currency could tank further to a low of 1,420 won," said Lee Min-hyuk, a KB Kookmin analyst, in a report.

The Korean won is likely to fluctuate between 1,400 and 1,420 won, unsettled by the deepening U.S.-China trade feud, leading to weaker exports for Korea, he said.

Reinforcing this view is the growing probability of the rapid and full implementation of Trump's campaign pledges, bolstered by a "red sweep," where the Republican Party wins control of both the presidency and the Congress — including the Senate and the House.

"More legislation will be passed into law, powered by overwhelming centralized political control."

Similarly, an NH NongHyup report indicated that the expected range would be between 1,360 and 1,420 won.

Higher U.S. tariffs will boost the value of the dollar, the report said.

"Cheap labor costs will no longer be available upon the deportation of illegal immigrants in the U.S., sending salaries higher for job creators," it said. "The Fed's easing will stall."

On Wednesday, three-year U.S. Treasury yields ended at 2.96 percent, up 4.2 basis points from the previous session. Yields on 10-year bonds came to 3.134 percent, up 6.1 basis points.

Some say Korean bond yields could experience a short-term spike of between 10 and 15 basis points in the event of a red sweep, as indicated by 10-year U.S. Treasury yields surging 20.61 basis points followed by comparable Korean figures jumping 18.5 basis points after Trump's victory in the 2016 U.S. presidential election.

Bank of Korea Gov. Rhee Chang-yong speaks during a seminar at Sogang University in Seoul, Oct. 30. Yonhap

Impact on key rate

The Korean central bank is facing a dilemma as the plunging won will hamper the pace of monetary easing ahead of its Nov. 28 rate-setting meeting.

Any further widening in the interest rate differential between the Fed and the BOK will trigger a foreign capital outflow, accelerating the won's depreciation.

The BOK said the weakening won will have a limited impact on the country's exports, because the advantage of Korean-made outbound goods relies more on quality rather than the price due to overall industrial advancements over the past few decades.

More of a concern is import prices rising, including for crude oil, factors that weigh on the country's current account and trade surpluses.

Deputy Prime Minister and Finance Minister Choi Sang-mok said the realization of the U.S. president-elect's policies will have a significant impact on the Korean economy.

"The government will take action to respond effectively," he said during a meeting of economy-related ministers at Seoul Government Complex.

Bitcoin surged to an all-time high of over $75,371, on Trump's "procryptocurrency" stance.

Shares of the country's shipbuilders, their partner supply manufacturers, as well as aerospace and robotics sectors rallied. Some of them registered intraday highs of over 12 percent.

Rechargeables and automobile manufacturers, meanwhile, saw their shares diving by about 4 percent.

The Korean currency traded at 1,396.6 won against the dollar, as of 3:30 p.m., shedding 0.4 won from 24 hours earlier. The KOSPI ended at 2,564.63 points, up 0.04 percent from the previous session.