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The Dollar Rules

Despite all economic and political turmoil in the United States, the greenback has appreciated to its strongest level in two decades as global investors have once again chosen it as their safe haven. Moreover, past experience suggests that it will remain overvalued until the US authorities decide that it needs to come back down.

LONDON – The first half of 2022 has been traumatic. Equity markets have suffered one of their worst six-month periods ever. Government bonds are undergoing a rare, significant decline. And the world of cryptocurrencies has experienced the rude awakening that many had long predicted for it.

Yet soaring above all the financial-market turmoil is the US dollar, which is now the strongest it has been in 20 years, having appreciated against many other currencies, including the euro. From a standard currency-valuation perspective, the dollar has reached the point at which many investors might seriously consider selling it. It is probably around 20% overvalued against most major currencies such as the euro and yen, and that simply does not happen very often.

But I would hasten to add that currencies usually don’t reverse course for valuation reasons. Rather, it normally takes action by policymakers to trigger a decline.

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