Why would the Euro be overvalued?
What are the implications of the Euro being overvalued?
Note that I’m not asking whether the Euro is overvalued, I don’t have any opinion either way, and I don’t really care. But I would like to know what it all means.
I’m selling my house and moving to the Euro zone (Italy.) I think I may be to blame for both the housing collapse and the dollar’s fall.
The Euro may be relatively over-valued to ‘ideal’ or reasonable ratio to the US Dollar by whatever benchmark (PPP, trade weighted average XR, etc) for a variety of reasons.
Primary may be that as one of two most liquid leading currencies, along with USD, Sterling and Yen, and least subject Central Bank XR management, may be taking on more of the USD depreciation than other currencies. The IMF also may feel USD is overshooting perhaps due to excessive reaction to US credit issues.
Certainly there is a hidden implication that the Asian currencies, with extensive CB intervention to maintain XR “stability” and prevent their valuation relative to the dollar from rising.
What it means, unambiguously is that demand for Euro is rising, demand for dollar is falling fairly rapidly. What that means is the US may be facing “interesting” challenges in continuing to finance its spendthrift ways although Chinese sovereign buying certainly helps.