The Iran War and Long-Term FX Fair Value: Winners and Losers

The war in Iran has caused a divergence in G10 FX fair values by altering commodity terms-of-trade and real rate expectations. Consequently, the USD fair value has weakened against most G10 peers, appearing overvalued relative to energy exporters like the NOK, CAD, and AUD.

Key Takeaways

• 1.The war in Iran impacted FX fair values by shifting terms of trade, real rate expectations, and productivity measures.
• 2.USD long-term fair value declined by 1.01% on average in Q126 as the currency lost yield/productivity advantages.
• 3.USD is currently seen as overvalued vs JPY, NOK, AUD, CAD, and SEK, and cheap vs CHF, GBP, NZD, and EUR.

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