3.5 dirhams, the fair value of the dirham against the dollar, according to the Big Mac index
According to the "Big Mac" index, which is adopted by the British "Economist Intelligence" unit as a measure of the fair value of currencies around the world, the UAE dirham is undervalued against the US dollar by about 4.8%.
According to the semi-annual update of the Big Mac Index, issued in July, the fair value is estimated at about 3.5 dirhams to the US dollar, compared to 3.67 dirhams, the official exchange rate.
The idea of the index is based on considering the price of the Big Mac sandwich as a unified measure of the fair value of currencies globally, as the index assumes that the price of the sandwich should be the same in all countries of the world, and the difference in prices, in the opinion of The Economist, reflects an imbalance in the valuation of currencies.
The index determines the fair values of the various currencies of the world against 5 major global currencies: (the dollar, the pound sterling, the euro, the Japanese yen, and the Chinese yuan), and the index was launched in 1986.
The price of a Big Mac sandwich in the UAE reaches 18 dirhams (equivalent to $4.9), compared to $5.15 in the United States.
euro
The value of the dirham is overvalued by about 2.8% against the euro, which reflects a remarkable change in the equivalent value according to the Big Mac theory from the past months, where the dirham was undervalued against the single European currency by about 6.6% in January 2022, and the fair price at that time was 3.85 dirhams against the euro, as a result of the increase in the price of the Big Mac sandwich from 17 dirhams at the time to 18 dirhams today.
The fair value of the dirham against the euro, according to the index, is 3.87 dirhams per euro based on data in July 2022, compared to a real value of 3.76 dirhams per euro at the present time.
sterling
The data of the Big Mac Index for the month of July showed that the dirham is overvalued against the British pound by 10.4%, and here we also note the large difference in the fair value gap resulting from the rise in the price of the Big Mac sandwich in Britain, where the dirham was undervalued in January 2022 The fair value against the pound sterling at a rate of 3.9%, and its fair value was 4.74 dirhams against the pound.
According to the data for the current month of July, the fair value of the dirham against the pound sterling is 4.88 dirhams per pound, compared to a real exchange value of 4.42 dirhams at the present time.
Japanese Yen
According to the index data for the month of July 2022, the UAE dirham is denominated above its fair value against the Japanese yen at a rate of 73.2%. The index assumes that the fair price of the dirham against the Japanese yen is 4.62 dirhams for every 100 yen, while the real current price is 2.66 dirhams.
Here, too, the change seems remarkable, but this time with the widening gap between the fair value and the real value with the increase in the price of the Big Mac in the UAE, where the dirham was overvalued last January against the yen by no more than 36.7%.
Chinese yuan
According to the data of the current July, the index showed that the dirham is worth more than its fair value against the Chinese yuan, by a difference of 37.8%. According to the index, the fair price of the dirham against the yuan should be 0.75 dirhams per yuan, while the real exchange rate is 0.54 dirhams per yuan.
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