Bank of Montreal economists says that the U.S. dollar is substantially overvalued.

BMO notes that the U.S. dollar has climbed to its highest level since the mid-1980s, despite record current account deficits. “The near record current account deficit as a share of GDP is compelling evidence that the U.S. economy is uncompetitive at existing currency valuations.”

BMO says that the capital inflows required to finance continued current account deficits in the recent range would move net indebtedness to over 35 % of GDP by 2005. “The counterpart to rising net indebtedness is that international investors are increasing the share of U.S. assets in their portfolios. It is unlikely that this could continue indefinitely in the absence of steadily increasing rates of return on U.S. assets relative to that elsewhere.”

“In our view, a return to a sustainable current account deficit position – around 1.0 % of GDP – would require a depreciation in the trade-weighted US dollar of 20-25 %.”