Bogotá — The US dollar has lost strength in recent weeks, after the noise generated by the risks of a banking crisis in developed economies following the collapse of several banks, and which, among other reasons, has boosted appetite for risk and currencies other than the greenback.
The US dollar’s weakness has made the Colombian peso the third-strongest currency in the world so far this month. According to Bloomberg data, the Colombian peso has appreciated 3.88% in the first 12 days of the month, making it the only Latin American currency among the world’s three strongest.
By emerging markets, the Colombian peso (with a 3.88% appreciation) and the Brazilian real (with 2.93%) are the only two Latin American currencies of the top five emerging countries that are gaining the most ground against the US currency.
What explains the peso’s strength against the US dollar?
“In recent months the peso has been one of the most volatile currencies in the region, and taking into account that it was also one of the most punished in the last quarter of last year, it has also had room to correct part of that differential with regional peers,” explained Diego Gómez, external context and exchange market analyst at Corficolombiana.
Gómez added that it must be taken into account that “in the first months of the year there is usually an inflow of foreign currency to honor tax payments and distribution of corporate dividends and this has also generated downward pressures on the exchange rate”.
Likewise, “the economic reforms have moderated with respect to what was talked about in the campaign, and this moderation, for example, of the effect of the pension reform in the public debt market has also contributed to financial assets being less punished”, added Gómez.
For Juan David Ballén, director of analysis and strategy at Casa de Bolsa, “the Colombian peso is characterized for being one of the most volatile currencies in the world due to structural factors such as dependence on oil, having few agents in the market, among other reasons. Therefore, we are used to leading the rankings of both devalued currencies as well as the strongest”.
From the point of view of David Cubides, manager of economic research at Alianza Valores, “for some time now we have been saying that Colombia was very punished, it had a very high premium in the currency, partly related to the political adjustment, but we also said that the economic fundamentals were still solid, with high oil levels and investment flows coming in. The political issue has taken a back seat and the economic issue is starting to take precedence”.
Will the peso stay strong against the greenback?
Ana Vera, chief economist at IN ON Capital, explained in recent days to Bloomberg Línea that it is possible that the Colombian peso will maintain its strength in the world during this month due to the fact that, as there will likely be no rate decisions by the Federal Reserve, “there is enough appetite toward emerging countries for both stocks and bonds, and that strengthens local currencies”.
According to Diego Gómez, whether the Colombian peso will continue to be one of the strongest currencies in the world in April will depend on “what continues to happen abroad with core inflation in the US, and the Fed’s monetary policy”.
“Although there are specific factors that explain the outstanding performance of the peso, the trend will continue to be determined by the level of risk aversion in international markets,” Gómez added.
Which prices drop with a cheaper dollar?
When the US dollar weakens, products bought abroad or brought from abroad usually drop in price. Some examples are computers, cell phones, business machines, food or raw materials to produce food, among others.
Therefore, given that the dollar has been falling in recent weeks, it is expected that inflation in Colombia will begin to fall, because if it is cheaper for businesses to import products, prices for the final consumer could go down.
It should not be forgotten that inflation remains at historical levels not seen since 1999, above 13.3% per year, however
Another positive impact, according to Diego Gómez, is that the foreign debt becomes cheaper and this encourages taxes to be used for other fruitful issues for the economy, such as investing more in a number of sectors, for example health and education, among others.
However, a cheaper dollar could also have some negative impacts for part of the Colombian population. Remittances could be affected because fewer pesos would reach families receiving dollars from abroad. Also, less Colombian pesos would flow to those who export.
