Oct. 27 (Bloomberg) -- The Brazilian real’s 33 percent, world-beating rally this year pushed up the price of a Big Mac in Sao Paulo above that in New York and London, a measure that would indicate the currency is overvalued.

Buying McDonald’s Corp.’s flagship hamburger costs 8 reais in Sao Paulo, or $4.60, compared with $3.99 in New York and 2.29 pounds in the U.K. capital, or $3.75.

“That’s the price it should be at when you consider how strong the Brazilian economy has been,” Alexandre Lintz, chief strategist at BNP Paribas in Sao Paulo, said in an interview.

While President Luiz Inacio Lula da Silva and Finance Minister Guido Mantega say the currency’s strength threatens exports and jobs and imposed a tax last week to curb the gains, analysts such as Goldman Sachs Group Inc.’s Paulo Leme say the real will continue to appreciate. Leme got more bullish on Oct. 14, saying the real will climb more than 6 percent in 12 months.

The probability the currency will rise to 1.69 per dollar by Dec. 31 from 1.7377 is 70 percent, implied volatility from options trading monitored by Bloomberg shows.

“The real will continue to appreciate, and valuation now is really not an issue,” Leme, Goldman’s chief economist for Latin America in New York, said in an interview.

Brazil’s real is the best-performer of the world’s 16 most- traded currencies in 2009 and leads gains among emerging- markets, helped by demand for the nation’s stocks and bonds, a credit rating upgrade by Moody’s Investors Service and the economy’s recovery from recession earlier than most nations. The real was down 0.3 percent at 1.7388 per dollar at 6:20 p.m. in Sao Paulo.

Foreign Investment Jumps

Industrial output grew in the past eight months, companies resumed hiring and retail sales have returned to levels before credit markets seized a year ago. Economists forecast gross domestic product will expand 0.18 percent in 2009 and 4.8 percent next year, according to a weekly central bank survey.

Foreign inflows to local financial markets jumped to $10.5 billion between Oct. 1 and Oct. 16 from $1.4 billion in September, buoyed by an initial public offering by Banco Santander SA’s Brazilian unit, according to the central bank. Dollar inflows to Brazil’s stock exchange reached $5 billion through Oct. 19, after a $4 billion net inflow in September. The benchmark Bovespa stock index is up 68 percent this year.

Brazil’s benchmark interest rate -- while at a record low 8.75 percent -- remains relatively high compared with near-zero U.S. interest rates, luring more money to Brazilian securities.

Trade ‘Problems’

“No analyst will tell investors to sell Brazilian assets,” said Leonardo Kestelman, a Sao Paulo-based investment consultant for Dinosaur Securities in New York, who helps manage $660 million. The median estimate of 21 analysts surveyed by Bloomberg show the real ending the year at 1.75 per dollar.

All that enthusiasm is starting to worry Lula. In an interview with Folha de S. Paulo newspaper published Oct. 21, the president said the stronger real might “create problems” for the country’s trade balance.

“The exchange rate has always been a concern for us,” Lula said, according to Folha.

The central bank has been buying dollars in the spot currency market every day since May 8 in a bid to temper the gains. Last week, the government imposed a tax on purchases by foreign investors of local fixed-income securities and stocks.

“What we did was add a toll for the entrance of excess dollars,” Mantega said after announcing the measure Oct. 19.

Boom and Bust

Brazil has a history of boom-and-bust economic cycles of inflation and interest rate swings. Annual inflation that ran as high as 1,000 percent a year in the early 1990s has dropped to 4.3 percent. The benchmark lending rate has fallen from as high as 26.5 percent in 2003.

The real rallied this year after falling 60 percent between Aug. 1 and Dec. 8 last year as the seizure in credit markets led investors to pull money from developing nations.

The appreciation has pushed up more than the price of Big Macs. San Francisco-based Levi Strauss & Co.’s 501 jeans for men start at 189 reais, or $108.70, at stores in Rio de Janeiro. On Levi’s online store in the U.S., they start at $46. Small-size Pampers diapers made by Procter & Gamble Co. of Cincinnati go for 18 cents per unit when bought in a bulk package at Bentonville, Arkansas-based Wal-Mart Stores Inc.’s online store. At Wal-Mart in Brazil, a diaper costs 55 centavos, or 32 cents.

Jose Carlos Brigagao do Couto, president of Sindifranca, the shoe makers association in Franca in Sao Paulo state, said exporters want the real to trade as weak as 2.2 per dollar, or a 27 percent drop from its current level.

“It’s difficult to close deals at the present rate,” he said. “A company can lose a lot of money with a large order.”

Shoe Exports Fall

Franca’s shoemakers are increasingly directing production to the domestic market after exporting 15.7 percent of output last year, he said. Shoe exports will probably fall to 10 percent this year, Couto said.

“It will drop to zero if conditions don’t improve,” he said.

The real should weaken to 1.78 by March 31 and 1.89 by the end of next year, according to the outlook for U.S. and Brazilian interest rates reflected in forward rates compiled by Bloomberg.

BNP Paribas’ Lintz and Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York, say a fair value for the real may be between 1.80 and 1.90 per dollar. They also say valuations don’t seem to matter in Brazil.

The model Lintz uses, which takes into account commodity prices and the credit spread, isn’t effective for Brazil anymore “because growth is so strong,” breaking the relationship between those variables, he said.

Valuation Models

“The financial system will have to come up with new models for that kind of valuation, especially for emerging-market currencies,” he said.

Goldman changed its 12-month estimate for the real to 1.60 per dollar on Oct. 14, from 1.70 per dollar previously. For year-end, Goldman’s Leme predicts the real will trade at 1.65 per dollar on rising commodity prices and sustained growth of capital inflows.

Brazil’s economic fundamentals are “superior compared to its peers,” said Alvise Marino, an emerging markets economist at IDEAglobal in New York. “With so much liquidity available, the real just offers great returns.”

To contact the reporters on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net; Camila Fontana in Sao Paulo at cfontana@bloomberg.net.

Last Updated: October 27, 2009 16:37 EDT