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Big Mac Index predicts a 30 per cent fall in the euro

Oops. As the international currency bunfight gets underway, the Big Mac Index suggests the euro is overvalued by almost a third.

THE ECONOMIST’S BIG Mac Index, which attempts to calculate relative currency over- or under-valuation, based on the price of a Big Mac across the world, has always been done tongue-in-cheek.

Yet it frequently lines up pretty well with what more academic calculations of purchasing-power-parity find, and the latest prices for Big Macs forecast no relief from Asia’s currency appreciation pressures, plus bad news for the euro:

According to the Economist:

In Brazil a Big Mac costs the equivalent of $5.26, implying that the real is now overvalued by 42%. The index also suggests that the euro is overvalued by about 29%. And the Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list. The Japanese are so far the only rich country to intervene directly in the markets to weaken their currency. But according to burgernomics, the yen is only 5% overvalued, not much of a casus belli.

So the euro, currently at $1.39, would be fairly valued at about $1.08, says the index. If true, then it would mean the euro could hit even lower lows than it did during this spring when Eurozone crisis fears were in full force.

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Reprinted in full with the permission of Business Insider.

About the author:

Jennifer O'Connell

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