Korean Won: Undervalued Currency Supported by BOK Rate Hikes – BBH

The Korean won has gained notable support following the Bank of Korea's consecutive monetary policy tightening. Elias Haddad, an analyst at Brown Brothers Harriman (BBH), noted that after the Bank of Korea raised interest rates by 25 basis points twice to 3.00%, the USD/KRW pair has approached one-year lows, and he believes the won is currently undervalued.

**Rate hike cycle underpins won strength**

The Bank of Korea recently resumed its rate hike cycle to combat escalating inflationary pressures. According to market reports, the Bank of Korea announced a 25 basis point hike in its benchmark rate to 2.75% on July 16, marking its first rate increase since January 2023. Subsequently, the central bank continued tightening, pushing rates further to 3.00%. BBH believes this series of rate hikes has provided solid support for the won, driving the USD/KRW exchange rate lower.

**Inflation and external intervention create a complex backdrop**

Despite the rate hikes being positive for the won, the domestic inflation environment remains challenging. Data shows that South Korea's Consumer Price Index (CPI) year-on-year growth exceeded 3% in both May and June, above the central bank's 2% target. Meanwhile, the won's exchange rate has drawn attention from various parties. According to reports, U.S. Treasury Secretary Scott Bessent conducted "verbal intervention" regarding the won's depreciation via social media on January 14, stating it was inconsistent with South Korea's solid economic fundamentals. However, after a brief decline, the won rebounded as individual investors purchased dollars, reflecting the complexity of the market's long-short battle.

**Long-term perspective on an undervalued won**

BBH analyst Elias Haddad's view offers a long-term perspective to the market. Despite short-term volatility, the won is seen as having appreciation potential based on fundamental factors such as the Bank of Korea's firm tightening stance and the South Korean government's upward revision of its 2026 economic growth forecast to 3%. The USD/KRW pair is currently trading around 1381.91383, and the market will closely monitor the central bank's subsequent policy signals and the impact of global capital flows on the won's valuation.