USD is at its strongest mark in 30 years, according to the Economist newspaper’s January 2019 “Big Mac Index.”
The newspaper’s “lighthearted guide to exchange rates” measures the purchasing power of currencies against each other.
The gauge also compares the prices of McDonald’s hamburger, the Big Mac, in different countries with the actual exchange rate between the currencies to determine whether a currency is over- or undervalued.
For example, “a Big Mac costs 3.19 GBP in Britain and $5.58 in the United States. The implied exchange rate is 0.57 [GBP per USD]. The difference between this and the actual exchange rate, 0.78, which suggests the GBP is 27% undervalued,” the Economist said.
“In Russia, a Big Mac costs 110 rubles ($1.65), compared with $5.58 in America. That suggests the ruble is undervalued by 70% Vs USD. In Switzerland McDonald’s customers have to fork out 6.50 Swiss Francs ($6.62), which implies that the Swiss Franc is overvalued by 19%.”
The USD rose against most of its major peers last year year. The Dollar (.DXY) Index, which measures the Buck against a basket of peers, increased more than 4%.
While USD was relatively stable going into the end of Y 2018, a flagging equity market boom, waning cash repatriation by US companies, and the possibility that the Fed will not raise interest rates as many times as it previously signaled now pose challenges for the greenback, Reuters explained.
Last month, US Treasury Secretary Steven Mnuchin called the strong US dollar a “vote of confidence” in the US economy.
“Part of the reason why the dollar is strengthened is a function of people’s view of the US economy and economic growth relative to growth around the world,” Secretary Mnuchin said in a round-table interview at Bloomberg’s Washington office.
His remarks came about 11 months after he appeared to endorse a weaker USD at the World Economic Forum in Davos, Switzerland — comments that broke with tradition for the US Treasury secretary and caused the greenback to extend what was then a slide in its value.
“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Secretary Mnuchin said at the time, calling the currency’s short-term value “not a concern of ours at all.”
Secretary Mnuchin said his remarks on the USD in Davos last January were “reported somewhat out of context. Last year, I gave a comment, actually, that was intended to be a statement of fact and not a judgment.”
Trump has noted that a strong U.S. dollar can weigh on exports in the short term and erode economic growth. The president on Monday called the currency “very strong” in a tweet and suggested it’s one reason the Federal Reserve should refrain from raising interest rates this week.
However, Goldman Sachs Group Inc.earlier this week warned that the USD may be poised to decline.
Comments from Fed Chairman Jerome Powell recently boosted the chances that the central bank will pause interest-rate increases, strategists at Goldman wrote in a note.
Chariman Powell cited the events of Y 2016, when rates were kept unchanged through most of the year due to concerns about slowing growth in China. The potential hold presents a chance for the Buck to fall.
Have a terrific weekend.
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