**USD Remains Overvalued Against Major Currencies: Societe Generale’s Outlook for 2024**
*By Eren Sengezer, based on original reporting for FXStreet*
The US dollar (USD) has demonstrated remarkable resilience throughout 2023, bolstered by a hawkish Federal Reserve (Fed), persistent inflation concerns, and safe-haven flows. However, entering 2024, Societe Generale asserts that the USD remains overvalued compared to most major global currencies. According to their latest analysis, a shift is likely this year as macroeconomic and monetary trends begin to favor other currencies. This article unpacks that outlook in detail and adds broader market insights to provide a comprehensive assessment of the USD’s position in global markets.
## Key Points from Societe Generale’s Analysis
Societe Generale highlights several critical factors relevant to the U.S. dollar’s valuation and its future trajectory. Their report underscores that:
– The USD is still **significantly overvalued** versus other major currencies.
– Potential depreciation of the dollar is anticipated across 2024, especially if the Federal Reserve begins to **cut interest rates** as inflation trends downward.
– The turn in the global economic cycle and rebalancing of monetary policy expectations across other central banks are significant risks to the dollar’s dominance.
According to their strategists, one of the main reasons the dollar held up so strongly in recent years was due to strong U.S. economic data and the Fed’s aggressive rate-hiking cycle. However, with rate cuts being projected for 2024 and inflation slowing, the macroenvironment may no longer support the greenback’s elevated levels.
## Why the Dollar Is Still Overvalued
From a valuation standpoint, Societe Generale uses **purchasing power parity (PPP)** models and **real effective exchange rate (REER)** indicators, both of which suggest the dollar is trading well above its long-term fair value.
Here’s how overvaluation is assessed:
– **Purchasing Power Parity (PPP):** According to PPP models, the USD is significantly overvalued against the euro, yen, British pound, and most emerging market currencies. For example, the EUR/USD exchange rate is well below levels that would balance relative price levels between the Eurozone and the U.S.
– **Real Effective Exchange Rate (REER):** The REER of the USD remains near multi-decade highs. This measure adjusts for inflation and trade weights and helps to show when a currency is relatively strong versus its trading partners.
These metrics collectively suggest that the dollar is not justified at today’s levels unless the U.S. economic outperformance continues to pull away from the rest of the world—a scenario less likely as 2024 progresses.
## Key Risks and Drivers to Watch in 2024
Societe Generale, along with other analysts such as ING, Morgan Stanley, and Goldman Sachs, points to several forces that could compel a USD pullback in 2024.
### 1. Fed’s Interest Rate Pivot
– The Federal Reserve hinted in late 2023 that its aggressive rate hike cycle may be ending. With inflation drifting closer to the central bank’s 2% target, consensus expectations for rate cuts in 2024 have intensified.
– Fed Funds futures suggest markets are pricing in at least 75–100 basis points of rate cuts during 2024.
– Rate cuts would reduce the interest rate differential between the dollar and its peers, weakening the USD appeal.
### 2. Eurozone Stabilization
– If the Eurozone economy stabilizes or begins to improve, the EUR could strengthen against the USD.
– The ECB is also facing inflation pressure, but signs of fiscal recovery and increased investment may buoy the euro.
### 3. Japanese Monetary Normalization
– The Bank of Japan (BoJ) has kept rates ultra-low for years. In 2024, analysts expect it to begin adjusting this policy.
– Should the
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