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Source: Zhao Ying on Wall Street
according to UBS In the G10 foreign exchange valuation model, the US dollar is not as expensive as it seems. At present, it is overvalued by 2.5% - 5.5%, which is far lower than the 20-25% estimated by the analysis.
The "strong dollar" storm swept the world, but in fact it is not as expensive as it seems?
UBS pointed out in its report on Thursday that, According to the latest G10 foreign exchange fair value model, the US dollar valuation is still far from reaching an extreme level. At present, it is overvalued by about 2.5% - 5.5%, far lower than the 20-25% estimated by the analysis.
The model shows that the US dollar is overvalued by about 2.5% in the Fed's narrow TWI index and 5.5% in the DXY index, rather than the 20-25% overvaluation implied by the simple PPP model. The model adjusted the standard OECD's estimate of G10 PPP, and added the relative productivity (GDP per capita) and terms of trade.
UBS pointed out that the overvaluation of the US dollar was mainly due to the strong growth of the US currency relative to other G10 countries and the rise of commodity prices. However, the overvaluation of the dollar is not as serious as the simple PPP model implies, and helps explain why the dollar has been continuously strong recently
In other currencies, the yen is undervalued by about 25%, while the euro is undervalued to 5%.
UBS pointed out that the decline of the euro was mainly due to the adverse effects of the terms of trade, that is, the price of imported goods in the euro area rose faster than that of exported goods, and the poor growth performance relative to the United States.
The decline of the yen is also due to similar reasons. On the one hand, it is a negative term of trade shock, that is, the price of Japan's imported goods rises faster than that of its exported goods; On the other hand, the interest rate of the US and Japan has further expanded, and the yield of the US dollar is significantly higher than that of the Japanese yen, which makes holding the US dollar more attractive to investors.
Other currencies:
The Australian dollar, New Zealand dollar and Scandinavian currency are undervalued, and the Australian dollar is undoubtedly the cheapest, although the fair value estimated by the model may be too optimistic.
The Canadian dollar and Swiss franc are overvalued, and the Canadian dollar is overvalued because Canada's productivity performance is poor. The Swiss franc is also overvalued, although its fair value is much lower than the standard estimate. This reflects that inflation differences will continue to drive down the fair value of the euro/Swiss franc.
The British pound and the New Zealand dollar are considered to be close to equilibrium, which means that they are not overestimated or underestimated.
In addition, the FEER model of the International Monetary Fund (IMF) shows that the US dollar is overvalued by about 10%. UBS points out that with the reduction of the US current account deficit, this figure may be reduced in the next update. In addition, most of the overvaluation of the US dollar is for emerging market currencies. In the G10, only the Swedish krona and the Japanese yen are considered cheap. It is worth noting that the euro is slightly overvalued, which largely reflects its rebound from its 2022 low.
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