File Image: IOL
File Image: IOL

Rand undervalued by 57.9%against the dollar

By Roy Cokayne Time of article published Jul 18, 2018

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JOHANNESBURG - The rand is undervalued by 57.9 percent against the US dollar, according to the Big Mac Index compiled by The Economist. 

This is slightly weaker than the 57.3 percent the currency was undervalued against the dollar last year. 

The index is a light-hearted and informal way of measuring the purchasing power parity of currencies compared to the dollar by comparing the price of a Big Mac hamburger in the US with the prices of identical burgers in other parts of the world. 

The latest index shows that a Big Mac costs $5.51 in the US and R31.00 in South Africa. 

This implies a purchasing-power parity (PPP) exchange rate of R5.63 to the dollar compared with the actual exchange rate of R13.36 when the index was compiled, and suggests the rand is 57.9 percent undervalued. 

In 2001 the rand was undervalued by 68 percent and was the index’s worst performer. In the latest survey, the rand is ranked 46th out of 55 currencies. 

The Egyptian pound had the lowest PPP exchange rate in the latest index and was undervalued by 68.2 percent against the dollar. 

Only two currencies were overvalued compared to the US dollar in terms of the index. 

They were the Swiss Franc at 18.8 percent overvalued and Swedish Krone at 5.8 percent. 

Other currencies that were weaker to the dollar than the rand were the Azerbaijan Manat (-57.9 percent), Romanian Leu (-58.0 percent), Turkish Lira (-58.5 percent), Taiwanese $ (-58.8 percent), Indonesian Rupiah (-60.2 percent), Malaysian Ringgit (-61.9 percent), Russian Rouble (-62.0 percent) and Ukrainian Hryvnia (-65.4 percent). 

The Economist said markets pricing in a view on future events could weigh on a currency.

A country with an unstable economy or significant debt, particularly with the fear of default, would be near the bottom of the list. 

Expectations of whether a country would raise or lower interest rates in the future also affected demand for its currency, with higher future rates indicating an increasing return from holding that currency. 

Walter de Wet, a strategist at Nedbank, said the Big Mac Index was interesting, but was probably not the best measure to get a sense of the true value of a currency.


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