The Dollar Remains Overvalued Against Other Currencies

Dollar demand is pushing the US currency far above its intrinsic value, increasing the risk of market volatility.

1 us dollar bill

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Progress in developing novel coronavirus vaccines in the United States is raising expectations for a quick recovery in the world’s largest economy, boosting demand for the greenback as it is expected the vaccination will help the opening of the economies. 

According to the Nikkei equilibrium exchange rate, determined by Nikkei Inc. and the Japan Center for Economic Research, the dollar could be losing value because of the US economy’s growing government debt. The main aspects that the Nikkei EER is focused on are the economic fundamentals of a region are the most crucial ones, such as government debt and current account balance.

The disparity between the potential and real prices of the currency would inevitably result in a reaction. The world economy, which has been struck hard by the coronavirus pandemic, could be shaken if the dollar weakens quickly. The dollar was trading at 108 yen on April 16, 14 yen more than the Nikkei equilibrium exchange rate, or theoretical value, of the US currency against the Japanese currency, which was at 94 yen. In general, the currency of a nation with high government debt and a significant current-account deficit loses value relative to other currencies (FXY).

Between October and December 2020, the dollar’s Nikkei EER against the yen was 94 yen, relative to 110 yen between October and December 2019, before the coronavirus epidemic spread. Over the pandemic, the United States moved to shore up its faltering economy with huge monetary expenditures, resulting in an increase in government debt. If you were trading currencies online with Brokers or your own, around the fourth quarter of 2019 and the same quarter of 2020, the dollar’s Nikkei EER versus the yen changed by 16 yen, implying that the greenback lost 16 yen in value.

Furthermore, considering the United States’ future fiscal investment, the dollar’s Nikkei EER against the yen would eventually fall. The administration of President Joe Biden has also announced a $2 trillion stimulus plan and is exploring infrastructure spending. It is highly anticipated that the US government’s deficit will escalate if the administration struggles to find revenue, even by tax increases.

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