It’s been nothing but one-way traffic for the US dollar over the past year.
Since early 2017, the US dollar index, or DXY for short, has been slammed, losing close to 15%, leaving it at the lowest level since late 2014.
Even with that substantial decline, it’s still not close to being cheap, according to modelling from Deutsche Bank.
Here’s how the buck currently ranks in terms of valuation.
In an attempt to better identify which currencies are overvalued or undervalued based on capital flows, Deutsche created a new capital-based valuation model, something that it said was necessary given “capital flows have gained in importance over the past three decades”.
Combined with traditional trade-based PPP [purchasing power parity] modelling, it came up with the Cap-PPP model shown above to provide a better picture on what’s expensive and what’s cheap based on both metrics.
“A more complete picture of valuations is hence obtained by combining both models, which we do to produce an ‘overall’ weighted valuation, using weights that reflect the relative importance of capital and trade flows for each currency,” it says.
So how should you read the chart?
Basically, the further out from the centre the black line sits, the cheaper a currency is deemed to be, and vice versus.
While not the most expensive currency in the world right now — that honour goes to the high-flying Chinese yuan followed by the Korean won and New Zealand dollar — the US dollar is still deemed to be the seventh most expensive currency based on the Cap-PPP model.
Of what will surely be of interest to longer-term traders and investors, Deutsche says it found strong evidence that the Cap-PPP model has “significant predictive power for FX, both in terms of directional accuracy and the magnitude of moves, especially over longer-term horizons”.
Adding credence to this view, less than two months ago the model had the US dollar as the most expensive currency in the world. With the DXY down close to 7% since late November, the dollar is now deemed to be the the seventh most expensive currency in the model.
Something to consider, especially if you’re long the Chinese yuan, Korean won or Kiwi dollar, or short the Turkish lira, Colombian peso and Mexican peso at present.
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