South Korean Won Seen Undervalued, Backed by BoK Hikes: BBH

Brown Brothers Harriman (BBH) analysts have stated that the South Korean won is undervalued and is supported by the Bank of Korea’s (BoK) recent interest rate hikes. This assessment, as of early 2025, suggests that the currency may have room to strengthen against the US dollar, according to the firm’s latest commentary.

BBH’s Valuation Perspective

BBH’s view is based on a comparison of the won’s current trading level against its fair value, which they estimate using economic fundamentals. The analysts argue that the BoK’s monetary policy tightening, which has lifted interest rates to a level that is relatively attractive compared to other major economies, provides a solid foundation for the currency. This, combined with South Korea’s strong export sector and current account surplus, points to the won being undervalued in the current market.

The firm’s analysis comes at a time when the won has experienced volatility due to global factors, including US monetary policy and geopolitical tensions. However, BBH’s assessment suggests that these headwinds are outweighed by domestic economic strengths.

Bank of Korea’s Rate Hikes

The Bank of Korea has been among the more proactive central banks in the region, raising its benchmark rate multiple times over the past two years to combat inflation. These hikes have increased the yield differential between Korean and US assets, making the won more attractive to international investors seeking higher returns. BBH notes that this yield advantage is a key factor underpinning their bullish view on the currency.

Implications for Investors and the Economy

For investors, an undervalued won could present opportunities in Korean assets, including equities and bonds, as currency appreciation would add to returns. For the broader economy, a stronger won would help lower import costs, particularly for energy and raw materials, thereby easing inflationary pressures. However, it could also make Korean exports less competitive, a concern for policymakers who balance growth and stability.

Conclusion

BBH’s analysis provides a counterpoint to market pessimism surrounding the won, highlighting the supportive role of BoK policy. While currency forecasts are inherently uncertain, the firm’s assessment underscores the importance of monetary policy and economic fundamentals in shaping exchange rate movements. As always, investors should consider multiple perspectives and monitor global developments that could alter the outlook.

FAQs

Q1: What does it mean for a currency to be undervalued?
An undervalued currency trades below its fair value based on economic indicators like purchasing power, trade balances, and interest rates. It suggests the currency could appreciate in the future.

Q2: How do Bank of Korea rate hikes affect the won?
Higher interest rates in South Korea attract foreign capital seeking better yields, increasing demand for the won and potentially strengthening its value.

Q3: What are the risks to the won’s appreciation?
Global economic slowdown, geopolitical tensions, or a shift in US monetary policy could strengthen the dollar and weaken the won, offsetting domestic factors.