USD Is Overvalued Against the Pound, Yen and Euro

According to our Currency Purchasing Power Parity Diffusion Index, the dollar is overvalued against nine major country currencies while it is undervalued against nine other major country currencies. So our diffusion index shows a relatively mundane reading of zero. However, three of the countries that the dollar is overvalued against are pretty significant: the pound, yen and euro.

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With the ongoing devaluation of the pound since Brexit, the pound has not only reached its lowest level against the dollar in thirty years but it has also reached the most undervalued level on a PPP basis against the dollar since 1985. Our PPP model suggests that the pound is 21% undervalued against the dollar. It is just the third time since 1975 that the pound has eclipsed 20% undervalued against the dollar.

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Again thanks to Brexit, the yen has been moving stronger against the dollar as safe haven flows have helped push the yen to 100 per USD from 108 per USD. However, the yen remains very much undervalued against the dollar on a PPP basis to the tune of nearly 16%. This is a solid improvement from 2015 when the yen was undervalued by nearly twice that amount.

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Lastly, the euro is presently about 12% undervalued against the dollar according to our PPP model. The euro has been undervalued by approximately this amount for the past 18 months or so which is a major departure from the 2004-2014 period when the euro was consistently overvalued against the dollar.

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