Rising strength in the U.S. dollar points to the risk of a long-term correction, according to Harvard University professor Kenneth Rogoff, who also warned that investors may be overly optimistic about expectations that the conflict with Iran could end soon.
“The dollar is probably still overvalued by at least 20 percent,” said the former chief economist of the International Monetary Fund in an interview. “In every previous case where the dollar was this overvalued—or frankly, any major currency—it usually ended with a decline over a period of five or six years.”
Investors have largely moved into the U.S. dollar since the start of the Middle East conflict, viewing it as a safe haven amid rising geopolitical tensions and higher oil prices. The war has increased concerns that an energy-driven inflation shock could persist, as price pressures remain elevated, making it more difficult for the Federal Reserve to ease monetary policy.
The Bloomberg Dollar Index reached a record high in September 2022, as the Federal Reserve raised interest rates more aggressively than usual in an effort to curb inflation. The index is currently more than 10 percent below that peak.
Rogoff described the conflict with Iran as a “major stagflationary shock” that is further intensifying the effects of tariffs still gradually working their way through the system. Over the medium term, these pressures are more likely to push interest rates higher rather than lower, he said in a separate interview with Bloomberg TV in Hong Kong.
Markets are being naive if they believe the conflict with Iran is already resolved, Rogoff added.
“There will be more. But markets have simply decided it doesn’t matter and that, you know, everything will be fine.”
