Loonie 10% overvalued, new measure estimates

The Canadian dollar is 10 per cent overvalued against the U.S. dollar in a comparison that measures the purchasing power of the two currencies, according to economic research firm World Economics.

The World Price Index (WPI), published monthly by World Economics, estimates how undervalued or overvalued various currencies are against the greenback, using its own measure based on the cost of a basket of goods and services. Its estimates apply in October and are independent of world currency markets.

The loonie has recently been added to the index.

• A history of the Canadian dollar since 1950

The Canadian dollar is hovering near 96 cents US, down from par at the end of last year, but up from 70cents a decade ago.

However, the WPI suggests the current purchasing power of the Canadian dollar is just 87 cents US.

The loonies value is being buffeted now by the lack of resolution of the U.S. government shutdown, which could drag down the Canadian economy if the U.S. spins into recession.

The high value of the dollar is powered, in part, by an increasing reliance on oil to build the Canadian economy. At the same time, it is hurting Canadian exporters of manufactured goods whose products have become more expensive in the U.S. and world market.

The WPIestimates the Japanese yen is 26 per cent overvalued, while the Brazilian real is 22 per centand the British pound 13 per cent overvalued.

By contrast, the Indian rupee, which has been driven down in recent months as investors pull out of emerging markets over fear the U.S. would end its stimulus program, is 45 per cent undervalued.

Chinas yuan, which is pegged to the U.S. dollar, is estimated to be 13 per cent undervalued.

Euro also considered overvalued

Interestingly, the WPI also gives an estimate of the real value of the euro in Eurozone countries.It estimates the euro, like the Canadian dollar, is generally overvalued.

But in Germany, it is 1.4 per cent overvalued, in Italy it'sabout 10 per cent and in France a whopping 28 per cent.

The report notes the strain on the European shared currency by the big difference in what a euro will buy in each country.

The Eurozone has large internal inconsistencies due to the wide variation in the purchasing power of the currency within the Eurozone, the report said.