Dollar now priced for perfection - BoA Securities

The US dollar has rallied strongly since the US Presidential election, from an already high level, and Bank of America Securities sees the currency now priced to perfection.

In real effective terms, BoA estimated that the dollar ended 2024 at a 55-year high, following the longest uptrend in recent decades, which started in mid-2011.

“The USD has also reached extreme levels in nominal terms. Using the BIS NEER broad index (nominal effective exchange rate), the USD is the strongest it has been in the last 30 years, which is when the time series started,” said analysts at BoA Securities, in a note dated Jan. 8.

The dollar appears overvalued by 18.5%, the most in the last 30 years except when it was overvalued by 19% during the energy shocks from the war in Ukraine in 2022, the bank said. 

Its overvaluation increased by about 6.4% since the end of Q3 last year, to a large extent because of the US election. By comparison, it was overvalued only by 9.4% at the end of 2016, after Trump won his first US election.

Looking at G10 equilibrium estimates, the USD clearly stands out as the most overvalued – followed by CHF, with JPY and the Scandies being the most undervalued.

“We expect the USD to remain strong in the short term on the back of US inflationary policies, and particularly tariffs, but to weaken later in the year, as these policies take a toll on the US economy while the rest of the world responds. Policy uncertainty makes our baseline subject to substantial risks,” said BoA Securities.

 

Source: Investing.com