If you chew on the Big Mac Index, you’ll see that the dollar is gaining strength
07/25/2014 1:30 PM
07/25/2014 3:37 PM
The U.S. dollar is getting stronger, according to the closely watched — or at least heavily seasoned — index of global currencies known as the Big Mac Index.
A series of world currencies have weakened against the dollar over the past year, according to The Economist, which puts this only half-joking measure together.
The idea is that, all things being equal, the price paid for the same product around the world will tend toward equaling out. The theory is called purchasing power parity, and the index combines the idea with what it calls the notion of burgernomics to gauge the relative strengths of different currencies.
The Economist prices one product — the Big Mac — around the world and measures the change in its local cost over time. In India, where there are wide religious objections to eating beef, they use the Maharaja Mac, a chicken sandwich.
(They also weight the currencies by gross domestic product, but no need to go too deeply into that.)
The conclusion, according to The Economist: The average valuation has moved from “roughly neutral” five years ago to about 15 percent undervalued against the dollar now.
The most overvalued currency in the world, it says, is in Norway. A Big Mac costs 48 kroner — the equivalent of $7.77 — compared with $4.80 in the United States, according to The Economist.
The weakest currency in the world is in Ukraine, where the Big Mac costs $1.62.
Now a stronger dollar is terrific for some things. If you are buying a Maserati made in Italy or cheese made in France or grape leaves from Lebanon, it effectively lowers the price for you.
But if you happen to be in the export business — whether you are selling peanuts, pastries or legal services — you tend to hate a stronger buck because it makes what you are selling more expensive overseas.
However unscientific and however narrow its scope, the Big Mac Index is at least one slice of evidence that years of asset buying and near-zero interest rates by the Federal Reserve have not trashed the dollar’s value, as critics feared.
But the value of the dollar is not just about the number of dollars floating around the U.S. economy.
The dollar has always been a haven in tough times for investors, bulking up when other nations were embroiled in trouble. So the Economist release explaining today’s index attributed the dollar’s strength to the various international crises centered in or around Europe.
“It is not on the whole surprising that currencies globally are looking a bit less supersized,” the Economist release said.
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