MUFG Flags Downside Risks for US Dollar Amid Undervaluation

A new analysis from MUFG suggests that the US Dollar is undervalued against most of its G10 peers, implying additional risk premium priced into FX.

The regression models used by MUFG show that the US Dollar is undervalued versus eight out of nine currencies in the G10 space, with some factors contributing to this underperformance.

One possible explanation for the US Dollar's undervaluation is the Middle East conflict, which may have been priced into markets more quickly than other regions.

The intervention by the US Treasury last week, which involved supporting Japan in strengthening the yen and weakening the US Dollar, also weighed on the currency's performance.

Scott Bessent mentioned that an undervalued yen can drag valuations lower for Asia FX more generally versus the US Dollar, with the renminbi potentially also being undervalued.

The report suggests that the Wall Street Journal's revelation of President Trump speaking to Fed Chair Warsh 'repeatedly' since he took over may have undermined Fed independence and contributed to the US Dollar's underperformance.