Overvalued by 10%? Historical reference for the dollar

Rise or Fall?

The U.S. Dollar Index (DXY) reversed course about two weeks ago, bouncing off the downward trendline and the 50-day moving average, and is now once again approaching the “magic” 99 zone.

Hedging Against Downside Risk

Everyone is trying to hedge against a potential decline in the dollar.

The Interest Rate Connection

The spread between 10-year Treasury yields and the DXY is widening again.

Reserve Currency Status…

…typically lasts about a century. Chart 2 illustrates American dominance following World War II.

A 40% Dollar Drop Could Eliminate the Trade Deficit

The strength of the dollar remains a key driver of the U.S. trade deficit, tied to fiscal/monetary policy and foreign savings.

A full reversal of the dollar’s real 40% appreciation could bring the deficit to zero—but tariffs alone won’t be enough.

Tariffs might help if retaliatory measures are weak and the dollar continues to fall (as Deutsche Bank expects), but the trade-off will be higher prices and slower U.S. economic growth.

Monitoring

ETF flows targeting the USD show momentum in incoming investments.

More Monitoring

The USD Trade-Weighted Index (USD TWI) moves in sync with the U.S. share of global equity ETFs over the long term.

USD Historically Overvalued by About 5–10%

The real effective exchange rate relative to the past decade.

Further Weakening

Morgan Stanley expects the dollar to weaken by about 10% by the end of 2026 and predicts that the euro will gain the most against the dollar.