The U.S. currency is at its strongest level 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 flagship 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 pounds in Britain and $5.58 in the United States. The implied exchange rate is 0.57 [pound per dollar]. The difference between this and the actual exchange rate, 0.78, which suggests the British pound 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% against the greenback. 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 dollar climbed against most of its major peers last year year. The Bloomberg Dollar Index, which measures the U.S. currency against a basket of peers, increased more than 4 percent.
While the dollar was relatively stable going into the end of 2018, a flagging equity market boom, waning cash repatriation by U.S. companies, and the possibility that the U.S. Federal Reserve will not raise interest rates as many times as it previously signaled now pose challenges for the greenback, Reuters explained.
Last month, Treasury Secretary Steven Mnuchin called the strong U.S. dollar a “vote of confidence” in the U.S. economy.
“Part of the reason why the dollar is strengthened is a function of people’s view of the U.S. economy and U.S. economic growth relative to growth around the world,” 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 U.S. dollar at the World Economic Forum in Davos, Switzerland -- comments that broke with tradition for the U.S. 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,” Mnuchin said at the time, calling the currency’s short-term value “not a concern of ours at all.”
Mnuchin said his remarks on the dollar 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 U.S. dollar may be poised to decline.
Comments from Federal Reserve Chairman Jerome Powell recently boosted the chances that the central bank will pause interest-rate increases, strategists at Goldman wrote in a note.
Powell cited the events of 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 greenback to drop, Bloomberg reported.