Despite notable gains across major currencies this year, purchasing power parity measures show the US Dollar (USD) remains overvalued versus its peers, with limited upside for Euro (EUR) and growing downside risks emerging most clearly in GBP/AUD as relative rate support erodes heading into 2026, Société Générale's FX Kit Juckes analyst notes.

Broad FX gains fail to dislodge USD premium

"In the spirit of seasonal picture-drawing, here is a chart of the dollar’s percentage over-undervaluation according to PPP, since 1999. Back in 1999, the dollar was undervalued against the pound and the yen, fairly valued against the euro, expensive against the Australian dollar as the Asian crisis rumbled, and very, very expensive against the yuan, as China was at an earlier stage in its economic development."

"By 2008 the dollar was undervalued against most currencies, with the glaring exception of the yuan. Wind the clock on to now, and although the euro has gained 14% this year, the pound and Australian dollar 8%, the yuan 4%  and even the yen has gained 1%, the dollar remains overvalued against all of the other currencies.  The entire Asian block is anchored by the yuan, and the euro’s upside is likely to be increasingly limited too."

"Fighting the yuan’s undervaluation is tough, but the pair that stands out, is GBP/AUD. I’ve plotted that with PPP in the second chart and added 2-year rate differentials for good measure. It has taken a lot of rate support to get GBP/AUD back up to 2 and that support will erode away  in 2026  as the Bank of England cuts rates. A following wind from commodity/resource prices could help the AUD and pressure on the Chinese authorities to allow their currency to appreciate will remain. It all suggests that GBP/AUD upside is capped and there is downside potential."