QNB sees US dollar moving toward more "fair" levels

Doha: Qatar National Bank (QNB) said there is scope for further adjustments to US dollar valuations beyond current levels, expecting the currency to m...

Doha: Qatar National Bank (QNB) said there is scope for further adjustments to US dollar valuations beyond current levels, expecting the currency to move toward more "fair" levels, supported by the normalization of certain US economic indicators and broader moves of portfolio re-balancing.

In its weekly commentary, QNB said, "Foreign exchange (FX) markets are the clearest expressions of global macro trends, being at the centre of capital flows and the allocation decisions behind them. Last year, major FX markets have presented significant volatility.

The USD index (DXY), a traditional benchmark that measures the value of the USD against a weighted basket of six major currencies, has experienced an 9.6 percent depreciation in 2025, one of the worst performances for the greenback in almost a decade. In contrast, the Euro (EUR), the Swiss Franc (CHF) and the Pound Sterling (GBP) appreciated markedly against the USD." "After such a significant USD selloff, analysts and investors debate the direction of the USD going forward. There is currently no clear consensus when it comes to the USD. Bulls believe that the USD should be well supported by continuous US "exceptionalism" underpinned by higher productivity growth and a superior supply of high-quality assets. In our view, however, there is room for further USD adjustments to the downside." The bank pointed to three main factors that support its assessment.

"First, despite the significant depreciation in 2025, the USD still remains "overvalued" according to some standard metrics, suggesting the need for more long-term adjustments. A common way to look at currency "valuations" is to analyse trade-weighted, inflation-adjusted exchange rates, i.e., the real effective exchange rates (REER), and compare it to their own long-term averages or historical norms.

This REER metric is more robust than traditional FX rates as it captures changes in trade patterns between countries as well as economic imbalances in the form of inflation and inflation differentials. The REER picture for December 2025 suggests that the USD is indeed the most overvalued currency in the advanced world, by more than 17 percent of its notional "fair value."