We’ve put together a couple of tables showing the undervaluation of the world’s currencies based on their 2016 purchasing power parity against the U.S. dollar.
The Purchasing-power-parity (PPP) between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country’s currency will purchase the same volume of goods and services in the second country as it does in the first. In the WEO online database, the implied PPP conversion rate is expressed as national currency per current international dollar. The advantages and disadvantages of using PPP-based exchange rates rather than market exchange rates are discussed in the Finance & Development article “PPP Versus the Market, Which Weight Matters?” (March 2007) and Box 1.2 of the September 2003 World Economic Outlook (WEO). For the latest PPP weights revision, please see the “Revised Purchasing Power Parity Weights” section in the July 2014 WEO Update. For the 2008 PPP weights revision, see figure 1.16 from Chapter 1 of the April 2008 WEO. For 2003 PPP weights revision, please see Box A2 from the April 2004 WEO. For the 2000 PPP weights revision, please see Box A1 from the May 2000 WEO.
The International Comparisons Program (ICP) is a global statistical initiative that produces internationally comparable Purchasing Power Parity (PPP) estimates. The PPP exchange rate estimates, maintained and published by the World Bank, the OECD, and other international organizations, are used by WEO to calculate its own PPP weight time series. Currently, WEO PPP exchange rates are based on the ICP’s 2011 report. For more information, you can go to the World Bank’s ICP page. – IMF
The data give only an approximation of undervaluation as spot exchange rates have moved since the rates were calculated. Also note the differences from our recent post on the Big Mac Index, especially in Brazil.
We calculated over/undervaluation by taking the IMF’s estimate of nominal dollar 2016 GDP and divided by the PPP nominal dollar 2016 GDP.
Not perfect, but the data give and an idea just how overvalued the dollar is across the world on a purchasing power basis; that only 8, or just 4 percent, of world currencies are overvalued (and just slightly) versus the dollar; that China is not alone; that Russia is extremely undervalued; Aussie is the only overvalued G20 currency; and the Swissie is expensive.
Still, we expect the dollar to get much stronger over the next few years due to President Trump’s fiscal policy and the Fed’s monetary tightening.