Manipulation Power Parity

Concerns regarding currency manipulation are on the rise.  Twitter was all a flutter earlier this month when President Donald J. Trump sent out a note which accused both China and Europe of engaging in such behavior; he suggested that the U.S. should match their moves.  One of his political opponents, Senator Elizabeth Warren, has recently called for the dollar to be managed against other currencies as well, leaning on the findings from Fred Bergsten and Joseph Gagnon of the Peterson Institute for International Economics, a think-tank, to rationalize the call.

It all gets down trade.  An overvalued currency is a burden for a nation’s exports and a wind in the sail for those countries from whom it imports.  It is easy to see why American politicians are paying attention to this issue; if foreign currencies are too low, their constituents will have a steeper economic hill to climb.  So should they be investing so much political capital on the matter?

One way to determine whether a currency is too high or low is to eat fast food around the world.  Unfortunately, that can get expensive, so Atlas pays attention to the Big Mac Index from The Economist.  Since McDonalds attempts to construct the multi-tiered Mac with identical ingredients regardless where it is served, its price in any local is readily determined.  An implied exchange rate can then be created by comparing the sandwich's cost between any two countries.  When this implied rate is compared to the actual currency market rate, one can approximate whether (and by how much) one currency is under or overvalued relative to the other. 

Using data gathered in June 2019, from 55 countries and the Euro Area, just one currency (the Swiss Franc) was overvalued relative to the U.S. dollar.  The range of undervalued currencies was from 6.2 percent in Sweden to 64.5 percent in Russia.  Currencies from China, Canada, and Mexico (America’s three largest trading partners) are undervalued by 46.9 percent, 10.2 percent, and 53.9 percent respectively.  Peering out from the two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun, the concerns of the President and Senator are justified.