Is The U.S. Dollar Over/Undervalued?

If you are planning on retiring to a country other than the United States, you may want to have a glance at our following analysis.

Purchasing Power Parity

We have taken the October IMF WEO database and backed out their Purchasing Power Parity dollar deflator to get a sense of how cheap or expensive each currency in the world is relative to the US dollar.    When traveling to a foreign country, you can get a sense of the home country’s currency valuation by the purchasing power of your dollar in the local market for goods and services.

That, in a snapshot, is the concept behind Purchasing Power Parity exchange rates, which is long-term currency valuation measurement.   It gets more complex when considering other factors, such as the local GDP per capita, for example.

Nevertheless, the following analysis is a crude 10,000-foot view of dollar valuation throughout the world.  It does, in general,  pass the Economist’s Big Max Index smell (yummy) test,

THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case, a burger) in any two countries.  – Economist

Conclusions

Based on the 2018 data, there 172 currencies in the world undervalued to the U.S. dollar, ranging  from 83 percent to 1 percent.    There are 16 currencies overvalued to the dollar, ranging from a high of 37 percent in Switzerland to 0.9 percent.

All of the G20 currencies are undervalued except Australia.   Our friends Down Under may have a different view.  Must be their housing market.

Don’t get to caught up in the exact data points.  We view them as decent approximations and in the zip code.

 

PPP_G20

 

 

PPP_Over

 

 

PPP_Under

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