The euro is overvalued against the dollar by at least 30 per cent, according to Bank of Ireland.
Writing in the bank’s March bulletin, group chief economist Dan McLaughlin said: "The fact that most Irish visitors to the US find shopping to be inexpensive implies that the dollar is now undervalued against the euro, at least on the basis of purchasing power parity (PPP).
"Unfortunately, estimates of PPP differ, but most studies put the euro’s PPP rate against the dollar in a relatively narrow range, between $1.10 and $1.20, which implies that the euro is currently at least 30 per cent overvalued. If so, one might expect the euro to fall against the dollar."
Dr McLaughlin said the Bank of Ireland predicts a rally in the dollar later this year, but he warned of a "policy vacuum" surrounding the dollar which poses further downside risks as decision makers on both sides of the Atlantic seem "unconcerned" about the value of the dollar.
Dr McLaughlin said: "From the US perspective, a weak dollar has proven beneficial in that exports are the only major component of the US economy showing any serious growth.
"In Europe, the euro’s strength has proved beneficial from an ECB viewpoint, in that it has partially offset rising commodity prices and so helped to limit the recent rise in inflation.
"This leaves the 15 respective member states of the euro, where opinions differ, and where there is no body to voice concern let alone actually intervene, even if there was a unanimous view that the euro is too strong," he said.
