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Big Mac and the Dollar

July 31, 2014 in Economics

By Mark Thornton

Using McDonals’s Big Mac as the standard, the US Dollar looks relative firm compared to some other currencies. The chart below from The Economist looks at the purchasing power of currencies relative to the Big Mac in 2009 and 2014. A half dozen currencies have been relatively weak compared to the dollar and a half dozen have been in line with the dollar. Only the Norwegian Kroner and Swiss Franc have been relatively strong compared with the dollar over the time period. In a world currency war, most currencies, including the dollar could be losing purchasing power in an absolute sense.

Some central banks have helped their currencies slim down. The Swiss franc’s decline is thanks in part to the Swiss National Bank. It put a styrofoam lid on the franc’s value when capital began flowing in from panicked European investors, lest the rising cost of Swiss exports abroad drive Switzerland into recession. The Bank of Japan has also taken a bite out of the yen’s value. Its generous portion of quantitative easing has helped push the currency down from close to fair value to 24% below it.

The Chinese yuan, once the most undercooked currency in the index, is now only the 12th-most-undervalued, thanks to slow but steady appreciation in recent years. Yet because China’s economy has grown so quickly, it has piled on weight in the index, helping to push the average undervaluation even lower.

It is not on the whole surprising that currencies globally are looking a bit less supersized. A healthier American economy and reduced asset purchases by the Federal Reserve are a recipe for a stronger dollar. But American firms need to maintain their competitiveness. History suggests that even when Fed tightening is well done, it is rare that global credit conditions shift without a little scorching.

From the print edition: Finance and economics

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