Chief economist update: Don't buy a Big Mac in America

The Bloomberg US Dollar Spot index was trading at 96.7680 on the day Trump tweeted the below:

"China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games - as they have for many years!"

But hints (threats?) of US currency intervention were offset by changed market expectations that the Fed would cut the Fed funds rate by only 25 bps at its July FOMC meeting rather than 50 bps (prompted by the sharply stronger than expected US non-farm payrolls report for June) sent the US dollar index higher even higher to 97.4890.

While Trump only nominated China and Europe in his "currency manipulation" tweet, the US Department of Treasury Office of International Affairs had already put nine countries on its "Monitoring List" two months before in its report to congress on May 2019.

These include: China, Japan, Korea, Germany, Italy, Ireland, Singapore, Malaysia, and Vietnam.

Whether it's because of currency manipulation or what not, The Economist 's latest estimates of currency over/undervaluation versus the US dollar - based on its Big Mac index - show that POTUS has reason to cry foul.

"The Big Mac index is based on the theory of purchasing-power parity (PPP), which states that currencies should adjust until the price of an identical basket of goods-or in this case, a Big Mac-costs the same everywhere," The Economist said.

As per the data, a Big Mac costs US$5.74. Let's compare this with the countries included in the US Department of Treasury's Monitoring List.

Undervaluation versus the US dollar all around.

A Big Mac in China costs CNY21.00 (US$3.05), suggesting that the yuan is 46.9% undervalued versus the greenback (as at July this year). In Japan, relative Big Mac prices indicate the yen is undervalued by 37.5%; South Korea won by 33.6%; the Euro - Germany, Italy and Ireland - is 20.3% undervalued; the Singapore dollar is 25.8% undervalued; the Malaysian ringgit is 62.8% undervalued; and, the Vietnamese dong is 51.3% undervalued.

While the US Department of Treasury has not named any of these countries as outright currency manipulators to date, the US Commerce Department has already submitted proposals (in May this year), including the application of "countervailing" import duties on countries it deems subsidising its export of goods and services through an undervalued exchange rate.

As a matter of local interest, the 'Big Mac index' indicates that the Australian dollar is 25.8% undervalued against the US dollar.

Read more: Big MacChinaEconomistEuropeGermanyIrelandItalyJapanSingaporeTrumpFedKoreaMalaysiaReportVietnamBloomberg US Dollar SpotUS Department of Treasury Office of International AffairsJuly FOMCAmericaCongressLetSouth KoreanUSAUS Commerce Department
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