Despite notable gains across major currencies this year, purchasing power parity (PPP) measures show the US dollar (USD) remains overvalued against its peers, with limited upside for the euro (EUR) and growing downside risks becoming more apparent in GBP/AUD as relative price support erodes heading into 2026, notes FX analyst Kit Juckes of Société Générale.
Broad currency market gains fail to displace US dollar premium
“In the spirit of seasonal charting, here is a chart of the percentage of dollar overvaluation according to purchasing power parity, since 1999. In 1999, the dollar was undervalued against the pound and the yen, somewhat undervalued against the euro, expensive against the Australian dollar as the Asian crisis unfolded, and very expensive against the yuan, as China was at an early stage of its economic development.”
“By 2008, the dollar was undervalued against most currencies, with the glaring exception of the yuan. Although the euro has risen by 14% this year, the pound and the Australian dollar by 8%, the yuan by 4%, and even the Japanese yen by 1%, the dollar remains overvalued against all other currencies. The entire Asian bloc is based on the yuan, and the euro’s upside is likely to be increasingly limited as well.
“Fighting the devaluation of the yuan is difficult, but the pair that stands out is GBP/AUD. I plotted that with purchasing power parity in the second chart and added two-year spreads for good measure. It took a lot of price support to get GBP/AUD back to 2 and that support will erode in 2026 as the Bank of England cuts interest rates. Next winds from commodity/resource prices could help the AUD and put pressure on the USD. Chinese authorities will continue to allow Its currency is rising, all of which indicates that the uptrend for GBP/AUD is stalled and there is downside potential.
