The DBS Equilibrium Exchange Rates (or DEER) indicate fair values for global currencies relative to a trade-weighted currency basket.

The Euro (EUR) has rallied by over 13% against the USD this year, which has pushed up its valuation to the highest since April 2008. EUR has benefitted from capital outflows from US markets given concerns over erratic Trump policies, and with European debt markets being one of the few globally that can offer a similar size and depth as US debt markets. But the sharp rally in the EUR could face challenges as Trump threatens to push for a 20% minimum tariff on the EU, harping often on the EU's USD230bn trade surplus in goods with the US. The extent of EUR rally has also attracted attention from ECB policymakers, with ECB's Guindos mentioning earlier in July that the ECB should seek to avoid any sort of overshooting on the exchange rate. While the ECB is not expected to cut rates in July, there could be circumspection around excessive EUR strength.

The Japanese Yen (JPY) has depreciated in July and is turning more under-valued. Selling pressures on the JPY have risen in tandem with pressures on JGBs too, as markets fret about the outcome of Japan's Upper House elections. The ruling LDP's majority in the Upper House is at risk, and a poor election outcome implies that PM Ishiba could have to increase fiscal spending to tackle the cost of living and have less room for trade negotiations with the US. Risks to Japan's fiscal position without any new revenue measures, on top of uncertain prospects of a trade deal with the US, may dampen JPY sentiment. Nevertheless, given the large JPY undervaluation now, JPY is likely to recover should political risks abate.