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Investing.com -- In a note to clients, analysts at Bank of America said the U.S. dollar is finally approaching fair value after years of persistent overvaluation, though it still sees the greenback as modestly expensive on broad metrics.
In a research note, analysts John Shin and Alex Cohen wrote that “after years of overvaluation, USD has made a fast approach this year towards broad metrics of fair value.”
However, they added that “misvaluations have counterintuitively taken long periods of time and persist for years,” noting that the dollar has been overvalued for roughly the last decade.
The shift this year has been unusually swift and driven by factors outside the usual macroeconomic playbook.
BofA said the move has been “for less conventional reasons, such as German fiscal policy, the trade war, and the erosion of U.S. institutions.”
While the dollar has softened significantly, BofA explained that valuation metrics will become less influential as a driver going forward.
“Overvaluation is likely to become less an influential feature of the USD picture as we move closer to next year,” the analysts wrote.
Their broader outlook for G10 currencies is shaped instead by “growing stagflationary concerns, Fed rate cuts, and erosion of U.S. institutions.”
At a structural level, America’s trade deficit and Europe’s trade surplus point to a longer-term need for the euro to strengthen and the dollar to weaken.
BofA traced the roots of the current cycle back to the 2014 collapse in oil prices, which pushed the European Central Bank into quantitative easing and set the stage for a decade of dollar strength.