Estimates of Fundamental Equilibrium Exchange Rates, May 2016

The US dollar is overvalued by about 7 percent, approximately the same amount as estimated last year (May and November 2015). Divergent phases of monetary policy in the United States, on one hand, and the euro area and Japan, on the other, and a collapse in commodity prices drove the stronger dollar. After rising about 5 percent from October 2015 (the base of the November 2015 assessment) to January 2016, the real effective exchange rate of the dollar fell slightly below its October level by April 2016 (the base of the current estimates). This semiannual evaluation also finds the yen is slightly undervalued (by 3 percent) despite its recent strengthening, but there is no misalignment of the other two leading currencies, the euro and Chinese renminbi.