The case for a stronger Korean won 

The Korean won (KRW) is under heavy pressure amid the conflict in the Middle East and the resulting shock to oil flows. In the near term, the outlook remains highly uncertain, with elevated volatility likely to persist. Over the long run, however, a compelling case can be made for currency appreciation. 

The recent KRW selloff has driven the exchange rate toward 1,500 KRW/USD levels last seen during periods of severe systemic stress, including the 1997 Asian financial crisis and the 2008 global financial crisis. This is striking, given that today’s macro fundamentals differ categorically from those of earlier episodes.

Calm and crises

In both previous crises, KRW depreciation was preceded by a sharp deterioration in the trade balance. Today, South Korea’s trade surplus has surged over $15.5 billion, reaching a record high.

During those crises, South Korea’s short-term external debt-to-reserves ratio rose sharply, signalling mounting pressure on foreign exchange (FX) reserves. Currently, this ratio is near record lows, suggesting little external liquidity pressure

Past episodes of KRW weakness were accompanied by significant spikes in sovereign spreads. This time, South Korea’s credit default spread (CDS) stands at around 28.73 basis points – indicating a low credit risk surrounding South Korean sovereign debt.

From a financial market perspective, previous crisis episodes were characterised by synchronised selloffs in both South Korean equities and the exchange rate. This time, however, the sharp depreciation of the KRW has coincided with an explosive rally in the equity market. Historically, South Korean equities and the exchange rate have been positively correlated. Recently, however, the correlation has turned deeply negative.

In other words, the currency is trading at crisis-era levels without crisis-era fundamentals. The divergence has pushed the KRW into deeply undervalued territory relative to our fair value assessment. By several valuation metrics, the KRW has become the cheapest major emerging market (EM) currency.

Closing the performance gap

The balance-of-payments (BoP) identity – an accounting rule that a country’s total transactions should equate to zero – implies that a weakening KRW in the face of a record trade surplus can only be explained by substantial net capital outflows overwhelming current account inflows. Indeed, South Korean residents’ holdings of foreign assets have surged in recent years. 

Purchases of overseas assets – particularly US equities – began rising at the onset of the COVID-19 pandemic and accelerated over the past two years, likely driven by persistent underperformance of the domestic equity market.

Looking ahead, this surge in foreign equity purchases is likely to reverse. Korean equities have outperformed global markets decisively in recent months, narrowing the performance gap that previously drove capital abroad. Historically, sustained outperformance in Korean stocks has, with a lag, been followed by moderation or reversal of capital outflows.

In addition, regulators are considering measures to encourage repatriation of overseas investments. In late December, the government announced “tax breaks for reshoring investment accounts,” offering capital gains tax incentives on foreign stock holdings. Combined with renewed domestic equity strength, these measures are likely to incentivise repatriation, ease capital outflows, and support the exchange rate.

Another factor weighing on the KRW has been competitiveness pressure from the exceptionally weak Japanese yen. The key difference, however, is that Korea is benefiting from a much stronger positive terms-of-trade shock and a much bigger export boom. The external fundamentals of the KRW are therefore far stronger than those of the JPY. 

The gap between Korea’s robust terms-of-trade improvement and its weak exchange rate is a key driver of the KRW’s undervaluation in currency models.

A looming mini-boom 

Historically, both Korean equities and the exchange rate are pro-cyclical and sensitive to growth dynamics. Currently, however, the two are sending drastically different signals.

The stock market predicts acceleration, while the exchange rate reflects stagnation. The Korean economy is likely to experience a mini-boom, which will ultimately be reflected in a stronger currency.

Forward-looking indicators are encouraging. Recent purchasing manager index (PMI) readings – which measure the health of manufacturing or services sectors – have moved into expansionary territory, coming in at 51.1 points for February 2026.

Exports are a clear bright spot, reaching an all-time high led by semiconductors. Yet, producers have been cautious. Industrial production has barely grown despite a sharp surge in export volume. Instead, producers have been depleting inventories. Inventories have been contracting year over year since December 2023, making the current destocking cycle the longest in over two decades.

If export orders remain strong, restocking pressure could significantly accelerate production. A similar semiconductor export boom in Taiwan pushed its GDP growth; South Korea appears to be catching up.

All of this builds a strong case for the KRW to appreciate. It is deeply undervalued, fails to reflect improving cyclical momentum, and capital flows are likely to turn in its favour. 

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Ultimately, companies engaging in cross-border trades should be prepared with proactive hedging, flexible procurement, and optimised currency exposure to maintain pricing power and protect margins.

Exporters should prepare for margin compression on USD revenues by increasing hedge ratios, accelerating receivable conversions, and reassessing pricing power. Today’s weak KRW offers an opportunity to lock in favourable FX levels before normalisation erodes competitiveness.

Importers, by contrast, stand to benefit from lower input costs if the KRW strengthens. They should avoid locking in long-dated USD purchases at current weak levels and instead maintain procurement flexibility to capture potential currency upside.