Will its overvaluation prevent the US dollar from rising?

The real trade-weighted value of the US dollar remains well above its average and trend levels of the last ten years. This suggests that the currency may still be fundamentally overvalued after its slide this spring. Furthermore, the IMF recently forecast that the US current account deficit would be the equivalent of nearly 4% of GDP in five years’ time, exceeding the 3% of GDP threshold that the Peterson Institute for International Economics considers compatible with sustainable external balance. Still, we doubt that its apparent overvaluation will prevent the US dollar from rising through the end of next year, given the likely contrast in the policies of the Fed and most other major central banks. Indeed, it has already shown signs of recovering over the past month.