The Manila Times

The US dollar exchange rate based on a Hawaiian pizza

ONE of our good customers called the other day while on a lovely holiday in Hawaii. A part of the conversation touched on the snake that is, evidently, always found in paradise. From the conversation, I could understand that the price level on the beautiful islands is extremely high. A Hawaiian pizza costs approximately P1,500, which was at least what our good customer paid for the pizza, and the experience led to a conversation on whether the US dollar was priced right.

Using Hawaiian pizza as a basis for evaluating exchange rates is a direct competition with the wellknown Big Mac index from The Economist. I would almost call it controversial if one introduces a new “pizza standard” as a competitor.

Among pizza lovers, I would think that choosing Hawaiian pizza could also be controversial. Allegedly, the culinary creation was created in 1962 by the Greek Sam Panopoulos who had immigrated to Chatham, Canada. The controversial part is the pineapple that is used as a topping, which is supposedly either loved or otherwise by pizza fans. But despite the risk, I dare to take a closer look at whether the dollar should really correct 50 percent lower against most currencies so that the pizza in question can come down to what would be equivalent to P700 in Hawaii.

The advantage of using a Big Mac from McDonald’s is that the product being compared is the same all over the world. That’s not quite the case but local differences in the product aren’t a big source of error, so it’s well thought out by The Economist. Regarding the pizza in Hawaii, I did not go into detail with our client on clarifications that could explain the large price difference. Many goods have to be shipped to Hawaii, which makes most products expensive, and the pizza might have been enjoyed somewhere with white tablecloths on the tables.

In Hawaii, they grow some delicious pineapples, hence the name of the pizza. Whether a local pineapple was used on the pizza is an open question but I’m pretty sure that the usual Dan

ish version has pineapple that comes from a can. If this is compressed, I estimate that even such a large price difference is primarily due to local conditions and not an overvalued dollar, but perhaps there is something about the observation after all.

If one steps away from pizzas and burgers for a moment and dives into the research by the US Federal

Reserve, it can add some spice to the pizza view. The US central bank produces a couple of dollar indices that show the dollar value against a basket of currencies. The Real Broad Dollar Index showed that in a span of more than 15 years, the greenback reached the highest index value last October. It correlated with the peak in a sell-off in the financial markets, indicating that investors used the dollar as an escape solution away from the nervousness in financial markets.

The dollar’s strength is not equal to

all currencies in the world; actually, there are differences. Further, when considering reverse trends, it’s also important to include other market forces surrounding the individual currency.

Our client based in Denmark, and therefore monetary de facto in the eurozone, might find the pizza in Hawaii becoming cheaper by up to 10 percent within the next four months. One argument is that I expect the euro to strengthen because the European Central Bank is mostly behind in increasing interest rates. I expect

this to surprise the financial markets and it could temporarily move some capital toward Europe. But later this year, I expect investors in Western countries to focus on growth which they will find in the United States again wherein the flows go back there.

If I look into our own estimates, then the most undervalued currencies toward the US dollar seem to be Asian currencies. For the competitiveness of the Asian exporters, it’s good with a weak currency/strong dollar. Though the best bet is that the dollar will weaken against Asian currencies in general, it will be very important how it happens.

In 2022, enormous investment flows left Asian emerging markets but since then some have returned. I expect this to continue throughout 2023 which, of course, will dampen the exporters’ advantage, but the investment inflows hopefully will support economic growth so it’s a win for Asian countries whatever happens. A country-linked flow in Asia, I imagine, can be observed in Japan where rising interest rates will make Japanese investors withdraw overseas investments — it will not be very visible on the Hawaiian pizza index but the Big Mac should react.

Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Lundgreen is an international columnist and speaker on topics about the global financial markets.

Business Times




The Manila Times