Answer:
No, dollar was overvalued in late 1986. The evidences which support
this hypothesis are shown below:
- Trade deficit of the united states in late 1986 was large.
- Still dollar value was not weakening because of slow economic
growth in developed countries of Europe.
- At that time united states and European countries were
contributing majority of economic groth of the world and European
developed countries were having slow growth so dollar was not
weakening inspite of having negative balance of trade (trade
deficit scenario)
- The US interst rates were falling inspite of high inflation
which was a kind of contradictory move which was strengthening the
dollar.
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