Bank of America Securities has described the US dollar as “priced for perfection” following its sharp rally since the most recent presidential election. The currency reached a 55-year high in real effective terms by the end of 2024, continuing an upward trend that began in mid-2011.

Analysts at BoA noted that in nominal terms, the dollar has also hit extremes. Based on the BIS Nominal Effective Exchange Rate (NEER) broad index, the dollar is now the strongest it has been in the 30 years since the metric’s inception. In a report dated January 8, they highlighted the dollar’s overvaluation, pegged at 18.5%, which surpasses all levels in the last three decades, except for a 19% overvaluation during the 2022 energy crisis following the Ukraine war.

The dollar’s overvaluation has increased by 6.4% since the end of Q3 2024, a trend largely attributed to the US election. For comparison, the currency was overvalued by just 9.4% at the end of 2016 after Donald Trump’s first presidential win.

Examining G10 currencies, the dollar stands out as the most overvalued, followed by the Swiss franc (CHF), while the Japanese yen (JPY) and Scandinavian currencies appear significantly undervalued.

BoA expects the dollar to remain robust in the near term, driven by US inflationary policies, including tariffs. However, they anticipate a weakening later in 2025 as these policies exert pressure on the US economy, with other global economies responding in kind. The analysts cautioned that policy uncertainty poses significant risks to their baseline outlook.