MercoPress. South Atlantic News Agency

Uruguay Peso, most overvalued currency against US dollar says the Big Mac Index

For the Big Mac Index, the famous hamburger costs the equivalent of US$ 6,86 in Uruguay and US$ 5,85 in the US, meaning a Big Mac is 22,9% dearer in Uruguay

The Uruguayan Peso is turning out to be one of the most overvalued currencies (out of 52 surveys) against the US dollar. In other words according to the Big Mac Index, the US dollar is cheap in Uruguay and well below what is considered the long term “equilibrium point”.

The Big Mac Index was created by The Economist financial magazine, published every six months, and is a quick reference to have an idea if the different currencies are at a “correct” level. Big Mac Index is based on the purchasing power parity theory, which in the long run the different exchange rates, should lead to equal values of the different prices for an identical basket of goods and services.

The measure of reference is McDonald's hamburger, since it is assumed its value is sustained, year after year, and ingredients don't vary that much from country to country. Since July 2022, The Encomiast instead of the medium price of a hamburger in four leading US cities, decided on an average national price.

So according to June's Big Mac Index, the famous hamburger costs the equivalent of US$ 6,86 in Uruguay and US$ 5,85 in the US, meaning a Big Mac is 22,9% dearer in Uruguay.

In the case of Uruguay if the Big Mac price is adjusted by the country's GDP per capita, such a hamburger should be 16% cheaper, which means in other words that the Uruguayan Peso is overvalued 46,3% against the US dollar.

Given that the Big Mac in Uruguay costs Pesos 259, and in the US US$ 5,58, the implicit exchange rate is 46,42 Pesos, or the long term equilibrium price in the domestic market. In other words the difference between the current exchange rate of Pesos 37,37 to the dollar, means the Peso is overvalued at 22,9% against the greenback,

Big Mac thus is indicating that the long term equilibrium price for the dollar should be Pesos 46,42, or in other words when the price of Big Mac in Uruguay and the US are at similar level.

This represents that the Uruguayan Peso is the most overvalued currency against the US dollar out of 52 surveys, with the Swiss Franc the runner up, 39,6% above its equilibrium price.

Other overvalued currencies, the Argentine Peso, 33% at the official exchange rate; Sri Lanka rupee, 24,5%; Norwegian crown, 22,3%; Costa Rica colon, 16,2%; Euro, 15,5%; the Mexican Peso, 15,2% and the Swedish Crown, 10,1%.

One digit overvalues: the Colombian Peso, 7,1%; Brazil's Real, 4,9%; Polish zloty, 4,6%; Pound sterling 4,5%; Danish Crown, 3,2%; Saudi riyal and the Canadian dollar, 1,4%.

As to the undervalued against the US dollar, the Chilean Peso the least with 1,2% and the most the Taiwan dollar at 56,8%.

According to The Economist theory of the Big Mac, Uruguay's Peso is also 20% overvalued against the Swiss Franc and 40% over the pound sterling.