Is the Big Mac index consistent with recent American policy on currency manipulators? The two do not assess quite the same things. Our index records outcomes; policymakers, by contrast, try to punish countries that intentionally depress their currencies. America’s Commerce Department says it looks unkindly on currencies only if they are cheap because of government action. The Treasury is also concerned with manipulation, not undervaluation; it looks for evidence of intervention, as well as persistent trade imbalances.
Still, given currency gyrations over the past year, the Big Mac index could act as a cross-check on American policy. When covid-19 first spread, investors fled to the dollar, only for the trend to reverse after the Federal Reserve flooded markets with liquidity. Swings in the Mexican peso meant that, according to our index, it went from being 53% undervalued against the dollar to 61% undervalued over the first half of 2020, before the move was unwound. By contrast, the Vietnamese dong remained oddly stable against the dollar in the first half of last year.
Consistent with this, Mexico has escaped penalties from the Treasury and the Commerce Departments; Vietnam has not. On December 16th the Treasury labelled it a currency manipulator, citing its huge goods surplus with America and its intervention in foreign-exchange markets. The Commerce Department has whacked tariffs on imports of tyres from Vietnam, arguing that a depressed dong acted as a subsidy for producers.
On other fronts, though, America’s recent actions are at odds with our index. The Treasury also branded Switzerland a manipulator, based partly on its currency intervention of around $100bn (14% of GDP) in the year to June. Both versions of our index, though, suggest that the Swiss franc is overvalued against the dollar.