It is an extremely serious clue, contrary to what its name might suggest.
The famous Big Mac index, named after the iconic hamburger of the McDonald's chain, was created in 1986 by the British weekly
The Economist
.
Its objective is to compare the value of currencies across the world against the dollar, taking as a “
reference basket
” a product that is invariable and a priori identical to the four corners of the planet: the Big Mac.
If the trend at the start of 2021 is to overvaluate the dollar against other currencies, this is however a little less the case than during the last editions of the index, which comes out every six months.
This index is based on purchasing power parity, a method that takes into account the cost of living, and therefore inflation, and not just monetary valuations or devaluations.
Thus, it allows to compare effectively the currencies between them.
The very undervalued yuan
In recent years, the Big Mac Index has consistently shown that the dollar is significantly overvalued against other currencies.
At the start of 2021, this is still the case, but on a lesser scale.
Indeed,
The Economist
specifies in the preamble that the dollar remains strong and overvalued against most other currencies.
However, the weekly reports that in a list of 20 preferred trading partners of the United States, all increased their currencies relative to the dollar over the period, except Switzerland, the only country whose currency is overvalued against the dollar.
Conversely, the Chinese yuan is very largely undervalued, at -39%.
Read also: McDonald's takes advantage of the rebound in sales in the United States but is cautious about Covid-19
Economist Soumaya Keynes tells
The Economist
that the dollar has retracted a bit in the last months of 2020 mainly because it had exceptionally soared in the first half of the year.
“
When the covid-19 epidemic hit the United States, investors pounced on the dollar after the Fed flooded markets with liquidity,
” she explains.
According to our index, the Mexican peso then fell from a 53% devaluation against the dollar to 61%.
Before this movement is reversed.
"
