USD: already stretched overvaluation limits scope for further upside - MUFG

Lee Hardman, Currency Analyst at MUFG, foresee limited upside for the US Dollar despite of recent slew of encouraging macro data.

Key Quotes:

"The foreign exchange market is ending the week on a quiet note with the major foreign exchange rates stable overnight. The recent US dollar rebound has lost some momentum at the end of this week after running into technical resistance. It stands in contrast to the ongoing widening of yield spreads in the US’s favour after the more hawkish rhetoric from the Fed which was backed up by a material upside inflation surprise in January. There is now clearly a higher risk that the Fed could raise rates further as soon as at their upcoming meetings in March or May which could encourage further US dollar strength in the coming months. The US dollar’s failure in so far to fully strengthen alongside widening yield spreads could reflect in part that overvaluation is becoming more of a restraint. We highlighted in our latest FX Weekly report that the US dollar is already deeply overvalued against the other major currencies. As a result we believe that the scope for further US dollar upside is more limited now even as US economic fundamentals are encouraging a stronger US dollar."