Latin American currencies in the face of a rising U.S.

September 26, 2022

The value of the dollar continues to rise around the world. Even currencies that seemed stronger like the Euro are succumbing to it, and of course one of the regions most affected by these changes is Latin America.

In recent weeks, we have seen significant increases in the dollar in Latin American countries as the value of national currencies fall on fears of a recession. Several countries in the region have historic increases, and consumers are the ones who suffer the most in the end.


Causes of the increase in the value of the dollar

The rise in the value of the dollar worldwide is due to several internal and external causes, one of which is the increase in interest rates by the United States Federal Reserve (FED). Since March, the FED has been raising interest rates to control domestic inflation. In fact, in June it announced the largest increase in almost thirty years, a rise of almost 0.75 points.

Another reason for the dollar’s appreciation is due to the global uncertainty caused by the war between Ukraine and Russia. Investors worldwide see the dollar as the safest currency, consolidating it as the safe haven asset par excellence, which of course creates greater demand for the currency.


The consequences in Latin America

So far this year some local currencies in Latin America have appreciated, however, in recent weeks the situation has not been favorable for all local currencies, as they have suffered sharp falls, especially those of net importing countries, this combined with other factors such as indebtedness and political uncertainty have caused the U.S. currency to rise in price to historic levels.

If a country’s currency depreciates, the price of imported products rises and inflation increases, which also causes dollar debts to become more expensive. In addition, some countries in the region had already emptied their coffers due to the pandemic, and these situations can generate severe fiscal pressures in these countries.

The increase in the dollar occurs in a context of rising interest rates, especially in Latin America, where this increase has been more rapid, although the increase in interest rates is one of the traditional measures to curb inflation in the region, it also means a brake on growth.


Rising dollar in Latin American countries

Although Latin American countries share a scenario with similar conditions, each country has specific economic conditions that ultimately determine the success or failure to cope with the rising dollar.

The three countries with the worst devaluations are Colombia, Argentina and Chile. For their part, currencies such as the Mexican peso or the Peruvian sol, although they have lost ground against the dollar, have not seen major currency exchange turbulence, as has happened in other countries.


Unfortunately, the Argentine peso is at the top of the ranking of the most depreciated currencies in Latin America, this loss of value echoes the historical trend of devaluation in the country. After decades of recurring economic crises and inflation cycles, one thing is for sure, Argentines are opting for the dollar as a reserve currency. So we can summarize the cause of Argentina’s devaluation as a lack of confidence.


The Chilean peso is the second currency that has depreciated the most so far this year, however, this crisis only aggravated the situation, since the Chilean currency had been on a downward path against the dollar. On July 6, the exchange rate reached 1,000 pesos per US dollar, which set off the alarm bells to promptly review what is happening.


The Colombian peso ranks third in the ranking of currencies with devaluation, just behind Argentina and Chile. As in other countries, investors in Colombia have been concerned about sheltering their capital in a currency with less risk, the dollar. However, in this country, the political situation only aggravates the rise of the currency.

The arrival of Gustavo Petro to power only adds to the uncertainty, as the message that Colombia will be even more dependent on oil and the president’s refusal to sign new oil exploration contracts suggest that the country will end up importing gas and oil in the future.


Who is doing well

At the other extreme are countries that know how to take advantage of the opportunities that this crisis represents, we are referring to net exporters such as Uruguay and Brazil. The currency that appears to be the most solid at the regional level is precisely that of Uruguay; so far this year, it has appreciated more than 10% against the dollar. Experts point out that the basis of its success is that it has an export matrix of food products, the demand for which has soared thanks to the conflict in Ukraine.

For its part, Brazil is in a similar situation, thanks to the fact that it can earn dollars from exports, and the appreciation of the real has been boosted by the Central Bank, which has raised interest rates from 2% to over 13%.


The rise of the dollar will continue unstoppable, the effects will continue to be strong for Latin America and will not stop as long as internal factors such as political instability and external factors such as the war in Ukraine do not improve. Tell us, what do you think are the strategies that Latin American governments should take to cope with the rising dollar?