Rogoff Calls Dollar 20% Overvalued, Warns Markets ‘Naive’ on War

Elevated US dollar valuations signal long-term correction risks, according to Harvard University professor Kenneth Rogoff , who also warned that investors may be overestimating the likelihood of a near-term resolution to the Iran war.

“The dollar is probably at least still 20% overvalued,” the former chief economist at the International Monetary Fund said in an interview. “Every previous episode where the dollar — or frankly any major currency — has been this overvalued, it tends to come down over, say, a five- or six-year period.”

Investors have piled into the greenback since the outbreak of the Middle East conflict, seeing it as a safe haven during a time of rising geopolitical tensions and higher oil prices. The war has revived fears that an energy-led inflation shock could persist, keeping inflationary price pressures high and limiting the Federal Reserve’s ability to ease policy.

The Bloomberg Dollar Spot Index hit an all-time high in September 2022 as the Federal Reserve raised the policy rate at a faster-than-usual pace to contain inflation. The gauge is down more than 10% from that level.

Rogoff described the war as “a big stagflationary shock” that compounds the impacts of tariffs still working their way through the system. Over the medium term, the pressures are likely to push interest rates higher rather than lower, he in a separate Bloomberg TV interview in Hong Kong.

Markets are “naive” to think the Iran conflict is resolved, Rogoff added. “More things will happen. But again, the markets have just decided, doesn’t matter, you know, everything’s going to be fine.”