Synopsis:

BofA highlights that the USD remains significantly overvalued in G10 FX, both in long-term and more recent historical contexts, despite potential arguments of US exceptionalism supporting higher valuations.

Key Points:

1. Long-Term Overvaluation (20-Year View):

   • Across measures like REER (Real Effective Exchange Rate), IMF REER estimates, and BofA's in-house BEER (Behavioral Equilibrium Exchange Rate) models, the USD is the most overvalued currency in G10.
   • CHF follows the USD in terms of overvaluation, while JPY and Scandinavian currencies are the most undervalued.

2. Recent Context (10-Year View):

   • Limiting the analysis to the last decade, post-2014, when the current USD cycle gained momentum, reduces the degree of USD misalignment.
   • However, the USD still stands as the most overvalued in G10, followed by GBP and CHF. JPY and NOK remain the most undervalued currencies.

Conclusion:

BofA underscores the USD's persistent overvaluation in G10 FX, even when accounting for US exceptionalism and stronger fundamentals in recent years. This structural misalignment may have significant implications for future FX trends.