South Korea's won has shed some 4% since late July
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The Australian dollar, functioning as a proxy for Asia-Pacific currencies, is feeling the pain from the North Korean diplomacy crisis.
Australia has valuable trade ties to China. China, meanwhile, also takes in some 80% of North Korea's exports, leaving it in a prime power position should tensions over the rogue nation's nuclear capabilities escalate, most analysts have said. That means any fallout for China-North Korean trade, and their respective economies, could ripple through to Australia and the rest of the region.
"Anything that's bad for China is bad for Australia," Brad Bechtel, managing director in FX at Jefferies, said Wednesday.
Opinion:China is the key to avoiding nuclear 'fire and fury' in North Korea (http://www.marketwatch.com/story/this-is-why-china-wont-use-its-leverage-over-north-korea-2017-07-07)
In Wednesday trading, the Aussie dipped against its U.S. counterpart, with the Australian unit buying 0.7873 U.S. cents compared to 0.7914 late Tuesday in New York. It also weakened against the Japanese yen with one Australian dollar equivalent to Yen86.53.
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Tensions have already built up. The United Nations over the weekend passed economic restrictions on North Korea, including a previously reluctant China. North Korea continued to test what it now claims are nuclear-capable missiles, prompting U.S. President Donald Trump this week to threaten "fire and fury" if the North does not halt threats (http://www.marketwatch.com/story/trump-today-president-says-north-korea-faces-fire-and-fury-if-it-doesnt-halt-threats-2017-08-08). Pyongyang in turn threatened to strike the pacific island of Guam, a U.S. territory and home to a military base.
Read:How Trump's threat of 'fire and fury' is rattling stock-market calm (http://www.marketwatch.com/story/how-trumps-threat-of-fire-and-fury-is-rattling-stock-market-calm-2017-08-09)
Besides the Aussie's dip, the war of words between North Korean head of state Kim Jong-Un and President Donald Trump led to a rush to safe-haven currencies such as the Japanese yen and the Swiss franc rose .
"We're also in a profit-taking cycle, so people might be parking some money in the franc because of that as well," Bechtel added.
The yen's rise is a peculiar technicality to some observers given Japan's geographic proximity to the Korean peninsula and the fact that Japan's government upgraded the threat level from North Korea in its annual defense white paper released earlier this week.
But yen investors have a habit of repatriating cash during times of trouble, making the currency a de facto safe haven despite being neighbors with the aggressor at hand, Bechtel said.
This repatriation move also weighs on the South Korean won , which has weakened some 4% since late July, on the back of a mix of currency market technical factors and the diplomacy fallout with its neighbor.
The currency cross is also sensitive to export competition between Seoul and Tokyo, Bechtel added, so any stark moves could be seen as an indicator of trade-policy impact.
"The most likely victim of rising tension will be the won, where the risk of capital outflows [is] highest and where the Bank of Korea would be unlikely to stem the impact of ... outflows by intervening with its reserves," said Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie.
(END) Dow Jones Newswires
August 09, 2017 13:37 ET (17:37 GMT)