Credit Agricole CIB Research discusses the USD long-term valuation, comparing the current levels of USD overvaluation to the Q185 ones.
"We do not expect a rerun of the USD’s ‘80s show because the global economy is in better shape now and the Fed is one of many hawkish central banks at present. That said, we can still use the episode to assess the valuation extremes that the USD may reach before its outlook turns. To this end, we estimate the deviation of EUR/USD, USD/JPY and GBP/USD from their respective long-term fair values derived from purchasing power parity (PPP) and compare the current levels of USD overvaluation to the Q185 ones," CACIB notes.
"Our results suggest that while EUR/USD and GBP/USD are already looking extremely undervalued, trading c.30% and 18% below their PPP fair values at present, the FX pairs experienced an even more aggressive undervaluation in early 1985 (we use EUR/USD and PPP estimates based on national-level data prior to 2000). At the same time, the current JPY undervaluation exceeds that seen in 1985," CACIB adds.