Chicago Tribune, November 27, 2005. "People aren't quite sure on where things are going to go," said Michael Stumm, president of Oanda (www.oanda.com), which provides foreign-exchange services for travelers. "The dollar has gotten quite a bit stronger and has flattened off a bit."
Of course rates fluctuate, and it's almost impossible to predict which way the currency winds will blow. But in 1986, the Economist magazine in London devised a method for measuring the relative value of currencies against the dollar. It's called the Big Mac Index.
By comparing burger prices around the world, it supposedly offers a digestible guide to whether currencies are at their "correct" level against the dollar. It is based on the notion that a currency's price should reflect its purchasing power.
The basic argument is that if a Big Mac at current exchange rates costs more in France, for example, the currency is due for a correction, Stumm said.
"Ultimately the Big Macs of the world are going to end up the same price," he said of the theory.
A Big Mac in Europe now costs the euro equivalent of about $3.30, according to the index; a Big Mac in the U.S. costs $3. According to the theory, the euro is overvalued against the dollar by about 10 percent. (To see this, go to www.oanda.com/products/bigmac/bigmac.shtml.)
