Photo: Deutsche Bank
2010 has seen many a market commentator and participant slam the dollar, for a variety of reasons, including further Fed quantitative easing and weakness in the U.S. economy.There is a sense now, according to Deutsche Bank, that the dollar is undervalued against a global basket of currencies and that it may be time to get back in.
That conclusion is based on their assessment of dollar purchasing power parity. Deutsche Bank calculates this statistic utilising an average from January 1980 to December 2004, and uses the consumer price index to deflate the valuation.
Purchasing power parity looks at what you can purchase in once currency, vs. another. In the case of the dollar, right now, you can purchase less with it than other currencies. The well-known Big Mac Index — which looks at what a Big Mac costs in various countries in currencies —
So, from this metric it would seem the dollar is cheap, historically, compared to other currencies. Whether or not this is actually true, when considering current Fed policy, is up for debate.
And the yen, with worries about the strength of the Japanese economy and aggressive QE from the Bank of Japan, is too strong too.
Even though the UK is in recovery mode and cutting its deficit, its currency also appears too strong.
And the Canadian Dollar is now too high against the U.S., even though the country's economy remains robust and its commodities sector strong.
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