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Dollar sees another huge gain as colon continues to drop

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February 6th, 2014 (InsideCostaRica.com) The dollar continued to make significant gains against a falling colon, gaining an additional ¢5.38 yesterday alone.

 

The latest gains puts at ¢22 – or 4.3% – the dollar’s gain against the colon since January 2nd .

 

In retail banks yesterday, prices ranged between ¢513 and ¢520, and sale prices ranged between ¢528 and ¢532.

 

This morning the Central Bank reference rate stood at ¢514.76 (buy) and ¢529.39 (sell).

 

Trend could continue

 

Costa Rica’s vice president, Luis Liberman said the government will not sell large amounts of US dollars into the currency market, at least for the next six months, when the current government leaves power.

 

In the past, the government has sold large sums of dollars into the market in order to meet the government’s own currency exchange needs – namely, it receives foreign loans in dollars and exchanges a significant amount of them to colons.  Now, Liberman says the government will not be making any large foreign exchanges for the remainder of the current government.  With less supply of government-sold dollars in the market, the dollar is likely to continue to gain ground against the colon, at least in the near term.

 

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  • Karen Mata

    Check the colon/dollar chart over the past 10 years. Prior to the peg the dollar rise was linear. It was indicating rate of colon inflation. That linear rise if extended to the present would give you 700 colones/dollar.

  • Karen Mata

    The dollar peg seems to have largely coincided with the past 4 year presidential term.

  • Bruce Wessels

    At some point they would have to start devaluing the Colon. In 1994 Mexico went through a severe financial crisis due to it having overvalued the Peso…

  • dr meno

    I think all this is a false hike of the dollar before it crashes. What will be interesting of rCosta Rica , is that the Colon is depended ant and secured by the dollar. Just what the Rothchilds want to happen. I do believe they own the central bank of CR. Also the Petro dollar is losing support around the world. Hence the wars the USA started to try to affirm the Perto dollar by forcing countries to use it and establish central banks to loan out money to crash economies. Sorry more comment than I expected to do.

  • P mattingly

    This very predictable tragic economic play is unfolding and will get worse. The cause is a socialist bent government that spends twice the amount of revenue that it receives in taxes and is forced to borrow 50% of what it spends on the international market. More extremes examples of this currently unfolding economic adjustment / disaster is Venezuela and Argentina.
    The central bank of CR has made a feeble attempt to ‘plug the leaking dike’ by wasting its reserves of dollars by selling them on the international market with the hope of keeping the colon from rising. The central bank of a country that does this also has bills to pay and prints money to pay the bills and the inevitable result is inflation which has been going on but will not increase dramatically.
    This is a fools game that wastes a country’s reserves and keeps politicians in power. It is common practice for outgoing administrations of countries to let things ‘blow apart’ on their way out the door since they don’t have anything to lose. Anyone remember the implosion of the Mexican Peso in 93?
    Politicians do not have the courage to make the tough decisions to solve the problem of cutting back on the ‘free ice cream’ that they promise to the voters to get elected. The most common practice of ‘socialism’ is to go after the low hanging fruit and tax the ‘rich’ but inevitably it is never enough and borrowing only delays the tragic economic play that will end badly.

    • Bruce Wessels

      It was the 1994 Economic Crisis of Mexico also commonly know as the Tequila Effect. For years Mexico had over valued their currency.using a Fixed Exchange Rate .However, Mexico lacked sufficient foreign reserves to maintain the fixed
      exchange rate and was running out of dollars at the end of 1994. When the Mexican government tried to roll over some of its debt that was coming
      due, investors were unwilling to buy the debt and default became one of
      few options. A crisis of confidence damaged the banking system, which in turn fed a vicious cycle further affecting investor confidence. Who knows at this point if Costa Rica has started to devalue the Colon too late or not. In my opinion they should have stared sooner.

  • Derryl Hermanutz

    The colon, like many other emerging market currencies that are presently losing fx value against the US$, is not devaluing due to any “just noticed” underlying weakness in CR’s economy or fiscal situation. The EM currencies are losing fx value because investors are selling local currencies for dollars, in the expectation that Fed tapering will lead to hikes in US$ interest rates. Pretty much all of the “market consensus” is that US interest rates are going to rise, and markets behave as herds according to consensus expectations.

    The same money that is now herding out of emerging markets had previously pumped up the fx value of local currencies when investors bought those currencies with dollars to cash in on higher interest rates on investments denominated in currencies like the colon.

    Two years ago in Costa Rica you could get nearly 12% interest on colon-denominated investments, and only 5% on equally safe dollar-denominated investments, during a period when the colon’s fx value against the dollar was stable. At the same time, similar US$ investments in the US paid 2% or less. So global investors used dollars to buy colones in order to buy the high interest colon-denominated investments in CR.

    Currency markets are supply/demand markets, and rhe fx value of a currency is the “price” of that currency, all measured in terms of the global reserve currency which is the US$. When investors are selling dollars to buy emerging market currencies, the dollar price of those currencies rises. When the same investors are selling local currencies to buy dollars, the fx value of local currencies declines.

    This kind of investment that takes advantage of interest rate arbitrage opportunities in different currencies is called “hot money”. It’s like a tidal wave that lifts up the fx value of currencies as it floods into their markets, and drops those currencies as it floods back out.

    Fed tapering has induced a stampede out of EM currencies and back into dollars, so the dollar price of EM currencies is declining. Or you could see the same thing and say the local currencies are stable but the fx value of the dollar is rising. It just depends on which currency you see as the “fixed benchmark”, and which currency you see as “moving” against that fixed benchmark. You can say the dollar is rising against the colon, or the colon is falling against the dollar. Same thing, from two different perspectives. The dollar’s recent rise reflects changing expectations about interest rates in the US, not changing expectations about the finances in emerging markets, so it’s more accurate to see the dollar rising than to see the colon falling.

  • disqus_r8w0IwvvLw

    yes, Lieberman got what he wanted. Why did Chinchilla bring him in “to better the CR economy”? And why did Lieberman tell Ticos “raising the taxes” was for their own “good”??? He being a seasoned BANKER(one of the banks he worker for FAILED) knows how to suck value out of CR. Predictable whenever this type of banker is in charge… Hopefully the new Presidente will throw this guy out.

  • Geert gen

    Hi Bruce Derryl and others,
    What caused the sudden 8-10% devaluation of the colon at 3th of march? Can i expect more?
    I can’t quite figure it out since it is not just versus the dollar. I checked 10+ currencies and it dropped to all.