The euro hit a two-month high against the dollar earlier this week, prompting some to wonder whether the currency is overvalued at the moment.  Time will tell, but the ups and downs of the currency are nothing new.  To mark moments in the young currency's history when it has been overvalued, INSEAD's Antonio Fatas charted the dollar/euro exchange rate against the Purchasing Power Parity.  (Note: Fatas used the German mark to estimate what the value of the euro would have been had the currency existed before 1999): 

Fatas:

The Euro has fluctuated from a high value of 1.59 in July 2008 to a low value of 0.59 in February 1995. Are these numbers comparable? Not quite. Currencies are expressed in nominal terms so they are likely to move over time when inflation rates are not the same in both countries. In this particular case, we have witnessed an upward drift of the Euro over the years because inflation was on average lower in Europe. This trend can be captured by estimates of Purchasing Power Parity (PPP), in red in my chart. But even when we take into account this trend, the value of 0.59 in 1985 was a significant undervaluation of the Euro (the German Mark then) in comparison to PPP (around 0.95). Same for July 2008, the value of almost 1.6 represented a large overvaluation of the Euro relative to its PPP value (below 1.2).

We also see in the chart that episodes of overvaluation or undervaluation relative to PP are persistent. A strong Euro in the late 70s was followed by a very weak Euro during most of the 80s. During the 90s the Euro was in general above PPP estimates. Before the official launch of the "real" Euro in 1999, the German Mark was already heading down and this trend continued leading to another episode of undervaluation of the Euro. An episode that was stopped by a join intervention of the US Fed and the ECB in November 2000. Since then the Euro became stronger and stronger until it reached its peak of 1.6 in July 2008.

So, Fatas sees the euro as overvalued today, though not at an historically unprecedented level.

Read The overvalued Euro here.