How much USD strength is justified? As economists at Commerzbank note, an excess of USD strength also entails risks.

Is the dollar "overbought"?

“The fact that the dollar is appreciating against the yen – the perpetual zero interest rate currency – at a time when the longer-term Fed real interest rate expectations are crumbling, cannot be explained with inflation and monetary policy expectations. If I didn’t hate the word with such a vengeance, I would say that the dollar was ‘overbought’.”

“I would like to be able to argue that the longer-term view of the market for USD exchange rates is more important than what is being expected for the near future. However, if the future is uncertain, that is not necessarily applicable. To be holding USD longs at this stage slightly corresponds to the view that prefers the bird in hand rather than two in the bush.”

“However, the following also applies: as long as it is unclear what the ‘new normal’ will look like following this inflation shock, an excess of USD strength also entails risks.”