BCA's Chester Ntonifor says U.S. dollar is 'deeply overvalued'

Key Concepts

• Dollar Overvaluation: The assertion that the US Dollar is currently trading above its fair value based on economic indicators.
• Purchasing Power Parity (PPP): A theory suggesting exchange rates should adjust to equalize the purchasing power of different currencies.
• Defensive Currency: A currency traditionally considered a safe haven during market downturns.
• FX Volatility: The degree of price fluctuation in the foreign exchange market.
• Carry Trade: A strategy involving borrowing in a currency with a low interest rate and investing in a currency with a higher interest rate.
• Global Reserve Currency: A currency held in significant quantities by governments and institutions worldwide.

Dollar Overvaluation and Shifting FX Dynamics

The discussion centers on the argument that the US Dollar is “deeply overvalued” despite recent depreciation against other major currencies. Tony Fortt, Chief Strategist at BCA Research, bases this claim on multiple models, citing a 15-20% overvaluation when assessed using Purchasing Power Parity (PPP). He anticipates further depreciation of the dollar over the next 2-3 years as this overvaluation adjusts. This expectation is also supported by competitiveness measures, which indicate the dollar is less competitive compared to other currencies, though specific data wasn’t immediately presented in this excerpt.

The Dollar’s Diminished Defensive Role

Traditionally, the US Dollar has been considered a “defensive currency” – a safe haven during market stress. However, Fortt argues this reliability has diminished. He points to the market sell-off in early 2025, where the dollar failed to provide the expected defensive protection. He qualifies this statement, acknowledging the dollar’s continued status as the global reserve currency and safe haven, meaning inflows are still likely during periods of stress. However, the lack of defensive performance in 2025 has raised concerns about its future reliability in that role. As Fortt stated, “The dollar has obviously not provided that defensiveness that you needed during the market sell off that we got earlier in 2025.”

FX Volatility and Emerging Market Currencies

The conversation then shifts to the increased volatility in the FX market, exemplified by movements in the Yen and the Chinese Yuan. Fortt suggests that while holding some dollars can be prudent in a rising volatility environment, it’s crucial to understand the changing dynamics. He attributes the appreciation of many emerging market currencies against the dollar to “fundamentals,” specifically attractive “carry” opportunities.

A “carry trade” involves borrowing in a low-interest-rate currency (like the US Dollar) and investing in a higher-interest-rate currency. Countries like Mexico, Poland, and various South American and Asian nations currently offer attractive carry trades. However, he specifically notes that the Chinese Yuan’s appreciation is complicated by China’s ongoing deflationary pressures, which significantly impact its long-term fair value against the dollar. He highlights that China is “facing deflation” as a “major impact on on on what's happening in terms of the long term fair value of the Yuan against the US Dollar.”

Logical Connections and Frameworks

The discussion flows logically from the overarching theme of dollar overvaluation to its implications for the dollar’s traditional role as a safe haven. The conversation then expands to consider the broader FX landscape, acknowledging increased volatility and the influence of fundamental factors like interest rate differentials and inflation (or deflation) in emerging markets. Fortt implicitly employs a framework that combines macroeconomic analysis (PPP, competitiveness measures, inflation) with market dynamics (carry trades, safe haven flows) to formulate his outlook.

Data and Statistics

• Dollar Overvaluation: Estimated at 15-20% based on Purchasing Power Parity.
• Yuan Strength: The Chinese Yuan is at its strongest level against the US Dollar since 2023.
• Time Horizon: Fortt anticipates further dollar adjustment through 2026 and 2027.
• 2025 Market Sell-off: Used as a case study to demonstrate the dollar’s diminished defensive capabilities.

Synthesis/Conclusion

The core takeaway is that the US Dollar, while still a dominant global currency, is likely overvalued and may face further depreciation in the coming years. Its traditional role as a defensive asset is being questioned, and investors should consider the changing dynamics in the FX market, particularly the attractiveness of carry trades in emerging market currencies. Understanding the fundamental drivers of currency movements – including interest rates, inflation, and economic competitiveness – is crucial for navigating the increasing volatility in the foreign exchange landscape.