Where is the euro-dollar exchange rate headed?
What does this analysis mean for the euro, the dollar, and their exchange rate? In recent work (Bénassy-Quéré, Béreau and Mignon (2008)), we argue that the euro and the dollar both seem overvalued against trade-weighted basket of currencies based on any of the three definitions of the long run. With relatively optimistic assumptions concerning valuation effects and the reaction of trade flows to exchange rates, the euro is found to be overvalued in bilateral terms against the dollar: the “medium-long run” equilibrium rate is around 1.30-1.40, while today’s exchange rate is around 1.60. With more pessimistic assumptions, the euro still needs to appreciate against the dollar. However, in the long and very-long run, the equilibrium value of the euro is found much lower – around 1.10. Thus, our work suggests that the euro may have peaked and be due to fall. Still, the dollar appears overvalued against a number of other currencies, especially in Asia. The development of international securi
