BNP Paribas Says U.S. Dollar Overvalued, Sees Further Medium-Term Weakness
BNP Paribas said the U.S. dollar remains overvalued based on purchasing power parity metrics and is likely to face further weakness over the medium term.
In a recent report, the French lender noted that the dollar’s elevated valuation continues to weigh on global financial markets. The bank expects the euro/dollar pair to rise toward 1.24 in the near term, while projecting the dollar/yen pair to move toward 148 over the next 12 months.
BNP Paribas also anticipates that the Federal Reserve will cut interest rates twice before the end of the year, bringing the terminal rate to around 3.25%, a move that could add further pressure on the greenback.
Dollar Weakness and Market Volatility
According to the report, financial markets are experiencing heightened volatility amid the dollar’s ongoing decline. The bank pointed to indications that the Federal Reserve Bank of New York has reviewed exchange rate developments in the dollar/yen pair.
It added that potential intervention by the Japanese government in response to speculative currency movements has strengthened expectations of closer monetary policy coordination, contributing to increased volatility across other dollar pairs.
Yen Valuation and Policy Outlook
The report said the Japanese yen has remained undervalued for several years. Rising inflation in Japan has pushed real interest rates into negative territory, while long-term bond yields signal investor concern over persistent inflationary pressures.
BNP Paribas expects the Bank of Japan to raise its policy rate to 1.00% in April 2026, with the rate reaching a terminal level of 1.75% by mid-2027. The bank cautioned that market moves could accelerate if policy adjustments occur more quickly than currently anticipated.