SEOUL (Reuters) - South Korea’s central bank said on Thursday that U.S. President Donald Trump’s escalating trade war could drag on longer than expected and increase the risk of capital outflows while also raising volatility in the dollar-won market.

"Considering that the value of the won is greatly affected by fluctuations in the value of the yuan as well as the dollar, there is a possibility that the volatility of the dollar-won exchange rate will increase significantly," the Bank of Korea (BOK) said in a monetary policy report, which predicted that a trade war between the world’s two largest economies could intensify.

The report said the BOK will continue to "closely monitor foreign investment and the currency movement" as it remains wary of foreign investors pulling money out of Asia’s fourth-largest economy.

The won has gained 1.6% against the dollar so far this year, but dropped 14% last year, making it one of the worst-performing currencies in Asia.

The BOK on Feb. 25 cut interest rates by 25 basis points and significantly lowered its GDP forecasts, the third monetary easing since it started cutting rates from a 15-year high in October.

South Korea is grappling with the economic impact of U.S. President Donald Trump’s ongoing tariff war, which is likely to undermine corporate profits.

Domestic political unrest, following the brief declaration of martial law by impeached President Yoon Suk Yeol in December, also continues to dampen consumer sentiment.