Economics and markets

The U.S. dollar is unlikely to continue defying gravity

January 09, 2024

A line chart showing the level of a proprietary Vanguard U.S. dollar index between 1991 and 2023, as well as a range of fair values for the dollar during that time frame. While our assessment of fair value has varied, it has been relatively stable compared with the volatile level of the dollar. After starting the period in fair-value territory, the dollar appeared significantly overvalued from roughly 2000 to 2002, meaningfully undervalued from about 2006 to 2014, and significantly overvalued once more in 2022 and 2023.
A bar chart showing the level of Vanguard’s U.S. dollar index in 2013 and 2023, as well as the level we forecast for 2033. In addition to the overall dollar index levels, the graph shows our estimates of the factors that drive changes in the dollar index.  The dollar index rose from roughly 80 in 2013 to about 110 in 2023. Cross-border differences in fundamental economic factors—driven by productivity and long-term real rates, as well as short-term nominal rates and inflation—accounted for 28% of the dollar’s rise in the past decade. The correction of an undervaluation at the start of the period boosted the dollar by a further 32%. We attribute the remaining 40% of the dollar’s rise to overvaluation. Looking forward, we forecast the dollar index will fall from about 110 in 2023 to roughly 95 in 2033, driven by a market correction of the current overvaluation. Fundamental factors are expected to move similarly in the U.S. compared with other regions, offsetting a scant 1% of the decline in the dollar we expect over the next decade.


Ian Kresnak
Lukas Brandl-Cheng
Vanguard Information and Insights

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