US Dollar Undervaluation Flags Downside Risks
MUFG's G10 regression models indicate that the US Dollar is undervalued against most of its peers, suggesting additional risk premium priced into FX. This could be attributed to several factors, including the Middle East conflict, inflation concerns, and political interference at the Federal Reserve.
According to Halpenny, MUFG's analysis reveals that the US dollar is undervalued versus eight out of nine currencies in the G10 space. This underperformance may be influenced by the recent US-backed intervention in the Yen, which has strengthened the currency and weakened the Dollar. The subtle support for a broader Dollar devaluation versus Asia could also encourage investors to sell the Dollar when sentiment deteriorates.
The Wall Street Journal reported that President Trump has been speaking with Fed Chair Warsh 'repeatedly' since he took over at the Fed, which may reinforce concerns about political influence undermining Fed independence. This uncertainty is likely keeping yields higher without offering the dollar the usual support.