[Exclusive] IMF: "Korean Won Undervalued by 2.4%"... Heightened Tension in South Korea-U.S. Currency Talks

IMF External Sector Report:
Dollar Assessed as Overvalued by 11.9%
Japan Concludes Currency Negotiations with U.S.
Korea-U.S. Currency Talks Expected to Face Challenges

The International Monetary Fund (IMF) recently assessed the value of the Korean won as being undervalued by 2.4% in its latest report. This evaluation has sparked interpretations that the United States may use it as grounds to demand an appreciation of the won in ongoing currency negotiations between South Korea and the U.S. While Japan smoothly concluded its recent currency negotiations with the U.S. on September 11, concerns are growing that the South Korean government, which is facing difficulties in tariff negotiations, may also be subjected to U.S. pressure for currency appreciation.

According to the IMF's recently published "2024 External Sector Report," the Korean won was assessed to be approximately 2.4% lower than its real effective exchange rate last year. The real effective exchange rate refers to the average value of a currency, taking into account nominal exchange rates with major trading partners and changes in price levels. Assuming the optimal exchange rate is one where a country's export competitiveness is neither strengthened nor weakened, this means the Korean won is undervalued by 2.4% compared to that benchmark. An official from the Ministry of Economy and Finance commented, "The IMF assessed that the won is within the normal range," adding, "It is not deviating from fundamentals, but it is in a weak state." The IMF also analyzed that the U.S. dollar is overvalued by 11.9%, while the Japanese yen is undervalued by 3.3%.

Generally, a weak domestic currency tends to benefit exports while reducing imports. As a result, there are interpretations that the U.S. may use this as a basis to demand appreciation of the won during the ongoing South Korea-U.S. currency negotiations. Since the IMF's external sector report has historically been a key reference for U.S. administrations in evaluating foreign exchange rates, it could serve as a logical foundation for U.S. demands for won appreciation during negotiations. However, it appears that the Trump administration has not specifically cited the report's details in recent negotiation processes.

An official from the Korea Institute for International Economic Policy (KIEP) stated, "The Trump administration may use the report to argue that the won is undervalued," adding, "However, since the real effective exchange rate is based on the rate that would completely balance global trade balances, South Korea, which has consistently run a current account surplus, is structurally bound to be assessed as having an undervalued currency." The official further explained, "If South Korea increases its investments in the U.S., the resulting higher demand for dollars could make it structurally difficult for the won to appreciate."

There are forecasts that currency negotiations between South Korea and the U.S. may not proceed smoothly. Japan recently decided on aggressive cash investments during tariff negotiations, which helped it conclude currency talks without major issues. On September 11, the U.S. and Japan wrapped up their currency negotiations and issued a joint statement by their finance ministers. The two countries reaffirmed the principle that "exchange rates should be determined by the market and excessive volatility can negatively impact economic and financial stability," and reiterated their commitment not to manipulate exchange rates for unfair competitive advantage. Since Japan made significant concessions during tariff negotiations, including a $550 billion investment pledge in the U.S., it appears that the U.S. made no further demands regarding currency issues.

However, South Korea remains at an impasse with the U.S. over the proportion of cash investments and the South Korea-U.S. currency swap in tariff negotiations. As progress in tariff talks remains insufficient, the U.S. may seek to leverage currency negotiations to extract further concessions.