By BRIAN FALLOW economics editor
The New Zealand dollar should be worth 70USc, not 40c, according to the Economist's Big Mac currency index.
But when the exchange rate was last at the 70c level, in late 1996, the export sector was in serious pain.
Both the kiwi and aussie dollars are 40 per cent or more undervalued and "need to ketchup," the Economist has noted in its annual Big Mac survey.
The index is based on the idea that over time the exchange rate between two currencies should move towards purchasing power parity - that is, the rate that equalises the prices of identical bundles of goods in the two countries.
The McDonald's Big Mac burger is used as a rough proxy for such a bundle.
It costs $US2.54 in the United States, which at the prevailing exchange rate would be $6.27.
But locally the Big Mac is only $3.60, suggesting it is 43 per cent undervalued.
But it turns out that of the 30 currencies listed all but three are undervalued by that yardstick.
Which rather suggests that it is more a case of the US dollar being overvalued, which is not a controversial proposition these days.
The US dollar has put on a remarkably gravity-defying performance so far this year in the face of falling markets and mounting evidence of economic weakness.
Nevertheless it is significant that the kiwi and aussie dollars are 43 and 40 per cent respectively below McParity while the euro is only 11 per cent below, the yen 6 per cent below and the Canadian dollar 16 per cent below.
Markets economists' picks for where the exchange rate will be by the end of the year are generally in the 45USc to 50c range, but with a bias towards the lower end of that range.
NZ dollar lies 30c from McParity
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