Market declares victory, former IMF chief economist: the judgment is "too naive"!

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The long-term risk of the US dollar being overvalued and the uncertainty regarding the outlook of the Middle East conflict are forming a dual test for the market.

According to Bloomberg, former IMF chief economist and Harvard University professor Kenneth Rogoff stated that the US dollar is currently overvalued by at least 20%. Historical experience shows that such overvaluation usually sees a correction within five to six years. Meanwhile, he warns investors not to be overly optimistic about the trajectory of the Iran war.

This judgment has direct significance for the market. Since the outbreak of the Middle East conflict, investors have regarded the US dollar as a safe haven asset against a backdrop of geopolitical tensions and rising oil prices, prompting a large inflow of funds. If the conflict continues and the US dollar faces downward pressure for correction, the current logic of safe haven may be challenged.

According to a previous article by Wallstreetcn, Goldman Sachs' Dominic Wilson holds a similar view, believing that the market has not ignored war, but is simply no longer betting on the worst-case scenario. However, the current market pricing of extreme risks is low. At the same time, rate market pricing is “overly hawkish,” and the medium-term bearish logic for the US dollar remains unchanged.

US Dollar Overvaluation Risk: Five to Six Years of Historical Correction Patterns

Rogoff said, "The US dollar may still be overvalued by at least 20%." He cited historical experience, stating, "In every similar situation in the past, whether with the US dollar or other major currencies, whenever such overvaluation occurs, it usually corrects over about five to six years."

This scholar, who once served as the chief economist of the International Monetary Fund (IMF), characterizes the current overvaluation of the US dollar as a structural risk rather than a short-term fluctuation. The Bloomberg Dollar Spot Index hit a record high in September 2022, when the Federal Reserve raised interest rates at a rare rapid pace to curb inflation.

Since then, the index has fallen more than 10% from its peak, but in Rogoff's view, the adjustment is not yet complete.

The Middle East Situation: Judging a "Quick Victory" Is Too Naive

On the geopolitical level, Rogoff questioned the market's optimistic expectations. He believes that the idea the Iran war is already "mission accomplished" is naive, implying the market underestimates the possibility of the conflict continuing or escalating.

The resurgence of conflict in the Middle East has renewed market concerns about whether inflation shocks driven by energy can persist. If oil prices remain high, inflationary pressure will be difficult to dissipate quickly, which will limit the Federal Reserve’s space to ease monetary policy, and in turn profoundly affect the pricing of risk assets such as stocks and bonds.

Safe Haven Logic Faces Dual Pressure

Overall, Rogoff’s warning points to an inherent contradiction: the safe haven demand driving the strength of the US dollar precisely exacerbates its overvaluation; and the potential persistence of war further makes this overvaluation even harder to naturally dissipate in the short term.

For investors, this means that current safe haven trades entail a medium-term exchange rate correction risk—even if geopolitical logic still supports demand for the US dollar in the short term.

Risk Warning and Disclaimer ClauseThe market involves risk, investment must be undertaken cautiously. This article does not constitute individual investment advice, nor does it take into account specific investment objectives, financial circumstances, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Investing based on this article is at your own responsibility. ```