Tuesday 3 October 2023

Is ¢700 colones to one dollar around the corner?

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Dollar Exchange

¢533.49 BUY

¢540.31 SELL

03 October 2023 - At The Banks - Source: BCCR

Paying the bills


QCOSTARICA – The dollar exchange is expected to maintain an upward trend during the coming weeks and months, though it is not expected to exceed ¢700 colones to one US dollar.

But the market conditions point that the ¢700 mark will be surpassed, most likely in the first week of June, and it remains to be seen where it will go from there.

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Economist Vidal Villalobos at the Prival Bank assured that he expects the exchange rate to continue to increase at the same rate similar to that of inflation (today at 7.9%), for which the colon would depreciate a little more, at least up to the middle of the year (currently depreciating at a rate of 4%).

Currently, the dollar exchange has reached a historical high, the Central Bank (Banco Central) setting the reference rate for this Friday, May 27, at ¢676.88 for the buy and ¢682.74 for the sell.

At the commercial banks (private and state), at the close of business on Thursday, the buy rate was between ¢667 (Prival) and ¢674 (Banco Popular) and for the sell ¢685 (BCR) and ¢687 (BAC).

The dollar exchange has been rising since the beginning of the year. On January 1 the Central Bank reference rate was ¢638.75 for the buy and ¢644.91 for the sell. The rate did not move much until the middle of March, increasing ¢25 colones for the buy and ¢23 for the sell, sending the reference rate on April 1 to ¢663.06 and ¢668.24.

These increases in the dollar exchange are mainly due “to the increase in the prices of imports, but especially due to the super-expansive monetary policy that the Central Bank (BCCR) followed for more than 2 years,” according to economist Norberto Zúñiga, Consulting Partner at Ecoanálisis.

This expansive policy refers to the fact that the issuance of coins and bills circulating in the market doubled, together with a reduction in interest rates that the BCCR made to stimulate loans, a fact that Zúñiga described as excessive and that stayed longer than it should.

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Zúñiga explained that with the increases in inflation and the dollar exchange, the Central Bank has already reversed the expansive monetary policy and raised interest rates abruptly; however, this has not yet been transferred to the entire financial market or to the securities issued by the government, so the desired effect has not yet been obtained.

For this reason, Zúñiga assured that this measure of lowering interest rates generated a disincentive to invest in colones (lower interest rates generate a lower premium for investing in colones) and therefore increased the demand for dollars, which is another reason for the rise in the dollar exchange.

Movements in supply and demand always influence the price of foreign currencies, since if demand increases, it is necessary to raise the price so that it adjusts to the available supply.

In the past, the Central Bank has used its reserves to control the volatility of the exchange rate. For this, the Central Bank will require a greater number of reserves, which, according to President Rodrigo Chaves have been depleted by the previous administration, but contradicted by the current (and former) president of the Central Bank.

Five reasons that push the dollar exchange rate upwards

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Between January and May, the dollar exchange has risen by approximately ¢35. According to the economist Alberto Franco, the exchange rate rises for five specific reasons:

  1. There is a high demand for dollars to pay for imported goods.
  2. Exports, that is, what Costa Rica sells to the world and returns in dollars, grow less than what is bought on the international market in that currency.
  3. The rise in the international price of fuel means that RECOPE needs more dollars to pay for its purchases.
  4. There is pressure from rising interest rates in the United States.
  5. There is a high demand for dollars from people who save in this currency.

For the exchange rate to fall, or at least not keep spiraling, is in the entry of dollars through Eurobonds or the approval of some international loans that are pending in Congress.


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