World Economics - Insight , Analysis and Data

World Economics - Measuring the World

The World Price Index

Released: May 12, 2015

Short-Term Euro strength based on dollar weakness

  • Euro rises to average 2% overvaluation
  • German and French price disparity continues
  • Turkish Lira falls to 28% undervaluation

Euro Rallies against Dollar
The latest set of World Price Index (WPI) data for May indicates that the average value of the Euro against the dollar, which was close to parity in Purchasing Power Parity (PPP) last month, has now moved back to a 2% overvaluation. The reason lies more in dollar weakness and relative short-term yield differences than Eurozone strength. The WPI country data shows that there are still serious diversions in the relative prices between the main Eurozone members which will continue to threaten its integrity.

The methodology behind the WPI involves collecting price data for a representative basket of goods across different countries. This allows the measurement of the real purchasing value of national currencies across the world in terms of their relative purchasing power against a comparable basket of goods in the US.

In April, while the market foreign exchange rate stood at one US$ to Euro 0.92, the WPI average Euro exchange rate was also one US$ to Euro 0.92. Since then the dollar has weakened to one US$ to Euro 0.88, while the WPI for an average Euro, based on relative prices, has moved to one US$ to Euro 0.90 in May, an overvaluation of 2% in PPP terms.

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