New York, NY - The US Dollar, a global benchmark for currency strength and economic stability, is currently overvalued according to analysts at Bank of America. However, the financial institution also projects a significant shift, with the dollar potentially becoming undervalued by early next year. This forecast suggests a period of notable volatility for the world's primary reserve currency.
For months, the dollar has maintained a strong position against other major currencies, driven by factors such as aggressive interest rate hikes by the Federal Reserve, a relatively robust US economy compared to its global counterparts, and its traditional safe-haven status amidst international uncertainties. This strength has made US exports more expensive and imports cheaper, impacting trade balances and corporate earnings for multinational companies.
Bank of America's assessment of current overvaluation is based on various metrics, including purchasing power parity (PPP) and real effective exchange rates (REER). These models suggest that the dollar's present value exceeds what fundamental economic indicators would typically dictate.
Looking ahead to 2026, the bank's analysts anticipate a reversal of this trend. Several factors could contribute to a weakening dollar:
Potential Shift in Federal Reserve Policy: If inflation continues to cool and economic growth slows, the Federal Reserve might pivot to a more dovish monetary policy, potentially including interest rate cuts. Lower interest rates typically reduce the attractiveness of dollar-denominated assets, leading to capital outflows and a weaker currency.
Global Economic Rebalancing: As other major economies, particularly in Europe and Asia, show signs of recovery and their central banks potentially tighten monetary policy, the relative appeal of non-dollar assets could increase.
Reduced Safe-Haven Demand: A decrease in geopolitical tensions or an improvement in the global economic outlook could diminish the dollar's role as a safe-haven asset, reducing demand.
Twin Deficits: Persistent US budget and current account deficits could also exert downward pressure on the dollar over the medium to long term.
The potential shift from an overvalued to an undervalued dollar carries significant implications for various stakeholders. For American consumers, a weaker dollar could lead to higher prices for imported goods, while US exporters would find their products more competitive in international markets. Investors would need to recalibrate their portfolios, considering the impact on foreign exchange hedging strategies and the performance of international assets.
Bank of America advises businesses and investors to prepare for increased currency fluctuations and to consider strategies to mitigate potential risks associated with a more volatile dollar. The precise timing and magnitude of these shifts will depend on a confluence of economic data, central bank actions, and global events in the coming months.
