Although there are some views that the U.S. dollar is overvalued, analysts at Brown Brothers Harriman say there is still room for the currency to move higher, based on the Federal Reserve’s broad trade-weighted dollar index, which is different from the U.S. Dollar Index. They explain that that the Federal Reserve dollar index includes China and Mexico, two of the biggest trading partners with the U.S., and unlike the traditional currency benchmark, the Federal Reserve’s version is not heavily weighted against the euro. The analysts say the Federal Reserve’s index, has risen 12% from its lows in 2011 to the end of 2014, but prices have not broken their long-term downtrend. “It is difficult to consider the dollar strong on a real broad trade-weighted measure at current levels,” they say. “Given the relative closed nature of the U.S. economy the 12% appreciation of the dollar since 2011 is probably worth around 40 [basis points] of tightening, which has been more than offset by other developments, such as asset purchases, lower interest rates, lower oil prices and rising stock market.”
