The U.S. dollar is close to fair value for the first time since March, and so overvaluation is no longer a short-term headwind for the world’s reserve currency, according to Bank of America.
In a note published Tuesday, BofA rates and currency analyst Adarsh Sinha said that recent U.S. dollar depreciation has pushed the dollar index, known as DXY, below the bank’s implied forecasts for 2024.
The buck has been falling since the end of June, as investors increased bets that a cooling U.S. economy, alongside inflation that has subsequently dropped below 3%, will allow the Federal Reserve to start a cycle of interest rate cuts, making the dollar less attractive.
Sinha said the DXY had become overvalued partly because it was benefiting from low volatility, or vol, in markets that encouraged flows into the dollar from those seeking higher interest rates.
“Since then, the vol shock triggered by U.S. recession concerns and amplified by position unwinds has meaningfully reduced this overvaluation,” said Sinha.
For more on BofA’s reasoning click on the story below.
