The US dollar has risen too high? UBS: Exchange rate valuation is far from extreme levels

The "Strong Dollar" storm is sweeping the world, but it's not as expensive as it seems? According to a report by UBS on Thursday, based on the latest model of G10 foreign exchange fair value, the US dollar valuation is still far from extreme levels, currently overvalued by about 2.5%-5.5%, much lower than the estimated 20-25% by analysts. The model indicates that the dollar is overvalued by about 2.5% in the Federal Reserve's narrow TWI index and about 5.5% in the DXY index, rather than the overvaluation of 20-25% implied by a simple PPP model. The model adjusts the standard OECD estimate of G10 purchasing power parity, incorporating relative productivity (per capita GDP) and trade conditions. UBS points out that the overvaluation of the dollar is mainly due to the strong growth of the US currency relative to other G10 countries and the rise in commodity prices. However, the degree of overvaluation of the dollar is not as severe as implied by a simple PPP model, which helps explain why the dollar has been consistently strong recently. In terms of other currencies, the yen is undervalued by about 25%, while the euro is undervalued by 5%. UBS notes that the decline in the euro is mainly due to the adverse impact of trade conditions, namely the faster rise in import prices in the euro area compared to export prices, and poor growth performance relative to the United States. The decline in the yen is also due to similar reasons, on the one hand, negative trade condition impacts, namely the faster rise in import prices in Japan compared to export prices; on the other hand, the further widening of US-Japan interest rate differentials, with US dollar yields significantly higher than yen yields, making holding dollars more attractive to investors. Regarding other currencies: The Australian dollar, New Zealand dollar, and Scandinavian currencies are undervalued, with the Australian dollar undoubtedly being the cheapest, although the model's estimate of fair value may be overly optimistic. The Canadian dollar and Swiss franc are overvalued, with the Canadian dollar overvalued due to poor productivity performance in Canada. The Swiss franc is also overvalued, although fair value is far below standard estimates. This reflects that inflation differentials will continue to push down the fair value of the euro/Swiss franc. The pound and New Zealand dollar are considered close to equilibrium, meaning they are not overvalued or undervalued. In addition, the International Monetary Fund's (IMF) FEER model shows that the dollar is overvalued by about 10%, UBS points out that with the narrowing of the US current account deficit, this figure may be revised downward in the next update. Furthermore, most of the dollar's overvaluation is against emerging market currencies, with only the Swedish krona and yen considered cheap among the G10 currencies It is worth noting that the Euro is slightly overvalued, which largely reflects its rebound from the lows of 2022