(Bloomberg) -- Hedge funds are ramping up bets in the options market that the South Korean won will mirror the Taiwan dollar’s recent rally against the greenback.

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Dollar-won option trading volume spiked to this year’s high last week, according to the Depository Trust & Clearing Corporation data, as speculation grew that Korea and the US discussed the won’s direction in their currency talks. Barclays Bank Plc said there’s been increased demand for put options from hedge funds.

A surge in the Taiwanese dollar this month has reshaped market expectations for Asian currencies. Investors see the won as a likely candidate for comparable gains, as Korea’s trade surplus with the US adds pressure on local authorities to tolerate a stronger currency. The US last year added Korea to its foreign-exchange monitoring list — which already included Taiwan.

A key question “most hedge funds have been asking is: which currency pair can have the same magnitude of move that was observed in” the Taiwan dollar, said Mukund Daga, head of foreign-exchange options for Asia at Barclays in Singapore. “This has led to decent demand for dollar-won put options in digital and vanilla formats by fast-money names.”

Vanilla options are standard contracts with no special features attached to them, while digital trades offer a fixed payout if the FX pair hits a preset level at expiration.

Demand for dollar-won put options with notional sizes over $60 million outpaced call options on DTCC by a 3:2 ratio on Wednesday, underscoring the bias for bearish bets on the pair. The premium to hedge dollar-won downside over the next month compare to the upside, as measured by risk reversals, traded near a 21-year high last week.

The dollar-won pair “was already seeing active downside interest for digitals and put spreads since the big move in the Taiwan dollar a few weeks back,” said Saurabh Tandon, global head of foreign-exchange options at Standard Chartered Bank in Singapore. “The recent FX related comments have spurred on interest in downside dollar-won trades.”

The tariff talks between the US and its trading partners have raised speculation that President Donald Trump’s administration is open to a weaker greenback. For many, the won is becoming a favored proxy for broader shifts in US-Asia trade dynamics and a key hedge against declining dollar strength.

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The won rallied last week as local media cited an unnamed government official as saying that the US believes a relatively weak local currency is a fundamental cause of Korea’s trade surplus. The finance ministry has said that while FX talks with the US are ongoing, nothing has been decided yet.

The Taiwan dollar’s 7% surge this month has raised hedging costs for Taiwanese insurers, who are large holders of US-dollar assets. That’s making the won a major proxy for hedging, according to a Bank of America note dated May 21.

The “market is showing insatiable appetite for owning optionality in the won,” said Ivan Stamenovic, head of Asia Pacific G-10 FX trading at Bank of America Corp. “We are seeing major interest across the term structure indiscriminate of tenors.

--With assistance from Jaehyun Eom and Betty Hou.

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