Brown Brothers Harriman (BBH) strategists have highlighted the South Korean won as a currency poised for potential gains, citing its current undervaluation and the Bank of Korea’s (BOK) evolving monetary policy outlook as key supporting factors. In a note published this week, the firm’s global FX team argued that the won’s weakness has overshot fundamental fair value, creating an attractive entry point for investors.
BBH’s Valuation Argument for the Won
The BBH analysis centers on the won’s real effective exchange rate (REER), a measure of a currency’s value against a basket of trading partners adjusted for inflation. According to the firm, the won’s REER has fallen to levels that historically signal undervaluation, suggesting the currency is cheap relative to South Korea’s economic fundamentals, including its large current account surplus and strong export sector. This undervaluation, BBH contends, is not fully justified by domestic or global risk factors.
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The BOK’s Dovish Shift as a Catalyst
A central pillar of BBH’s constructive view is the Bank of Korea’s recent policy trajectory. After holding rates steady for an extended period, the BOK has signaled a greater willingness to cut rates to support a slowing domestic economy. While a dovish pivot typically pressures a currency, BBH argues that the market has already priced in much of this expectation. Consequently, the actual implementation of rate cuts could remove policy uncertainty, allowing the won to strengthen as the outlook becomes clearer.
“The BOK’s dovish turn is well-telegraphed, and the won has already absorbed the initial shock,” the BBH note stated. “As the central bank delivers on its guidance, we see the undervaluation narrative gaining traction, particularly if global risk appetite stabilizes.”
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Context and Risks for the USD/KRW Pair
The won has been under pressure this year against a broadly strong US dollar, with the USD/KRW pair trading near levels that have historically prompted concern from South Korean authorities. However, BBH’s analysis suggests the pair may be near a peak, with the balance of risks shifting toward won appreciation. Key external risks include a deeper-than-expected global economic downturn that could hurt South Korean exports, or a renewed surge in geopolitical tensions. Domestically, household debt levels remain a constraint on the BOK’s ability to cut rates aggressively.
Investors will watch upcoming BOK meetings and monthly trade data for confirmation of the trends BBH has identified. For now, the firm’s analysis adds a notable voice to the debate over the won’s direction, framing its current weakness as a potential opportunity rather than a structural decline.
Frequently Asked Questions
What does ‘undervalued’ mean for the South Korean won?
It means the won’s current exchange rate is lower than what analysts consider its fair value based on economic fundamentals like trade balances, inflation, and interest rate differentials.
How does the BOK’s dovish outlook affect the won?
A dovish BOK signals potential interest rate cuts, which can make the won less attractive for yield-seeking investors in the short term. However, BBH argues that the current undervaluation already prices in this expectation, and actual cuts could reduce uncertainty and support the currency.
Is BBH’s analysis bullish or bearish on the won?
BBH is broadly constructive on the won, suggesting it has room to appreciate from current levels as the undervaluation corrects and the BOK’s policy path becomes clearer.
What are the main risks to BBH’s outlook for the won?
Key risks include a sharper-than-expected global economic slowdown, geopolitical tensions on the Korean peninsula, or a more aggressive tightening cycle by the Federal Reserve that strengthens the US dollar broadly.
