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Is the Dollar Cheap? It Depends

Wednesday, 20 Apr 2011 | 11:26 AM ET
Simon Willms | Stone | Getty Images

How you value the dollar depends on which valuation method you use. By one short term measure, it's not oversold at all.

Just about everyone is down on the dollar. Commodity-related currencies are hitting new highs against the U.S. currency, and the few stolid safe havens that haven't are close. That raises the obvious trading question: is the dollar oversold?

If you look at a valuation method like purchasing power parity, some pretty major currencies are significantly overbought, according to Camilla Sutton, chief currency strategist at Scotia Capital. She counts the Australian dollar as overvalued by 34%, the Swiss franc by 28%, the euro by 22% and the Canadian dollar by 21%. Using this measure, "Currencies are entering significantly overvalued territory," Sutton wrote in a research note, and "There are increasing reasons to be concerned."

But - of course there's a but - currencies can trade at overvalued levels for quite some time, Sutton said. With factors in play like the Fed's easy money policy and Standard & Poor's negative outlook, that certainly seems possible. And for short term traders, there are other reasons not to be concerned, Sutton said.

"More importantly for short term traders are the technical measure of over/under valuation, RSI. On this basis, there is not one primary currency that is overvalued, which leaves room for new highs even from here."

So pick your time horizon, and trade accordingly.

MULTI CURRENCIES v The Dollar

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