In the first half of 2022, the world faced a scenario of economic uncertainty, given, among other things, by the accelerated increase in post-pandemic consumption and the invasion of Ukraine, factors that contributed to a general increase in prices, that is, the dreaded inflation.
According to the World Economic Forum, inflation is rising around the world and food and energy prices are reaching historic levels.
In response to this inflationary trend, central banks are raising interest rates in an attempt to cool economies.
Indeed, the US Federal Reserve (Fed) raised its benchmark interest rate to a range of 1.5% to 1.75%, the highest in 30 years.
This boosted the dollar’s strength, to the point where it reached one-to-one parity with the euro, something that hadn’t happened since 2002.
The European Central Bank (ECB) responded, and this week raised interest rates by half a point, the biggest increase in 22 years.
The strengthening of the dollar and Latin American currencies
A stronger dollar in an unstable global context generates massive movements in the case of emerging markets, such as Latin Americans, in relation to investments in dollars, which leads to a shortage of the currency and, consequently, to an increase in its price.
Added to this, local tensions have led to a weakening of the region’s currencies, particularly in recent weeks.
The currencies of the six largest economies in the region have shown an upward trend, particularly in Colombia, Chile and Brazil, and a little more stable in Mexico and Peru.
However, the average trend is towards an appreciation of the dollar, that is, Latin American currencies are depreciating against the US currency.
Compared to the beginning of June, a dollar today costs 16% more in Colombia, 14% in Brazil and Chile, 8% in Mexico and 6% in Peru.
In Argentina it is 8% more expensive, but it is the only country where the official price of the dollar is established by the Central Bank.
The Chilean Peso and the Colombian Peso, the most undervalued
Since January 2022, the Chilean peso has been the most undervalued in the region. One dollar is 9.6% more expensive than at the beginning of the year, and reached its all-time high on July 14, when it rose to 1,060.63 pesos.
There are several reasons why the Chilean currency is among the most devalued in the world so far in 2022.
Chile is the largest producer of copper on an international scale, and China is its main trading partner, so the drop in the price of the metal had a direct effect on the country’s economy.
According to Bloomberg, the metal has lost almost a third of its value since the peak price reached in March; Furthermore, the article adds, the Covid-19 closures in China are eroding demand.
On the other hand, the southern nation is in a process of intense internal political debate. President Gabriel Boric, who has been in office since March, has low approval ratings and a plebiscite is looming on September 4 with the intention of approving a new political constitution.
The Colombian peso is the second most devalued currency so far in 2022.
In the coffee-producing country, an average of 4,070 pesos per dollar was paid in January. On July 22, the currency was quoted at an average of 4,424 pesos to the dollar, an increase of 8.7%. Furthermore, on July 12, the dollar reached an all-time high and was quoted at 4,665 pesos to the dollar.
It is worth noting that the trend until mid-April was the opposite (the Colombian peso was appreciating against the dollar) and reached a low of 3,690 pesos to the dollar.
However, the uncertainty due to the presidential race in which a change of political direction was defined, together with the external factors already mentioned, aroused an initial uncertainty that had an effect on the dollar price.
And the rest of the region?
Volatility as a result of the global context meant that rising raw material prices would benefit Latin America (a major commodity producer) in the first part of the year. This trend, however, varied from country to country.
In Brazil, although in recent weeks there has been a process of devaluation of the real against the dollar, when analyzing the panorama since the beginning of 2022, the price variation is negative: one dollar costs today 2.7% less than in January .
This case is similar to that of the Peruvian sol, which has lost its position against the dollar since June, but has become cheaper since January: a dollar costs 2% less.
The trend in Mexico is close to zero; compared to its average price in January, one dollar is only 0.49% Mexican pesos more expensive.
Argentina is an exceptional case. In addition to strict exchange control, it has one of the highest inflation rates in the world. This environment causes strong tensions for the monetary authorities, a recurrent situation in the country.
In conclusion, in an unpredictable global context with the uncertainty of the pandemic, war, inflation and political instability, exchange rate volatility is to be expected to continue.
We will have to see how the region’s monetary authorities respond to defend their currencies without harming their exports and economies. Esda is never an easy task.
Translation of Giulia Gaspar
