Monday 6 February 2023

The Mighty Colon: Why is the dollar falling in Costa Rica?

A specialist in exchange rate policy says several factors have pushed the price of the dollar downward.

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Dollar Exchange

¢567.55 Buy

¢576.23 Sell

4 February 2023 - At The Banks - BCCR

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QCOSTARICA – “Seems like the colon (Costa Rica’s currency) is one of the strongest in the world. Few have gained so much against the US dollar. Absolutely amazing,” writes long-term resident Pete King on the Facebook group Gringo Expats in Costa Rica.

“I remember when the Ccolon lost a little every day against the (U.S.) dollar. That ended around 2007. Since then when the colon weakened the central bank would use dollars to buy colones on the currency exchange to prop it up. That happened many many times. CR has not used this method recently.

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Not long ago, on June 23, 2022, the Banco Central (Central Bank) reference rate was ¢698.44 for the sell and ¢691.20 for the buy.

Screen capture Central BankAt the time, the colon traded at more than ¢700 at both State and private banks.

At the Mercado de Monedas Extranjeras (Monex),  where amounts greater than $1,000 are traded, the peak was on June 21, 2022, it reached ¢696.76 and since then it has trended downward.

Today, almost six months later, the Central Bank reference rate is ¢593.92 for the sell and ¢587.20 for the buy.

Screen capture Central Bank December 10, 2022

Why is the dollar falling in Costa Rica?

According to Miguel Cantillo Simón, a professor at the School of Economics at the University of Costa Rica, and a specialist in exchange rate policy, several factors have pushed the price of the dollar downward.

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Speaking to La Nacion, the UCR economist explains six factors of the declining U.S. dollar in Costa Rica and warned of other factors that could push up the price of the colon.

Among the main elements that have put downward pressure on the dollar, according to Cantillo, are:

  1. The increase in interest rates in colones.
  2. Decrease in the demand for foreign currency from pension operators.
  3. The growth of tourism.
  4. The attraction of investment from foreign companies.
  5. The reduction in the price of oil.
  6. Approval of Eurobonds (US$3 billion dollars in sales of securities in the international market for the next year, US$1 billion in 2024 and the same amount in 2025)

Cantillo pointed to several factors that could see the dollar rise against the colon in the very near future, such as the U.S. Federal Reserve raising interest rates and Bank of America warning of a possible recession next year. Both factors could affect tourism and foreign investment, reducing the amount of dollars in the market.

Sources: Banco Central, La Nacion, Facebook Gringo Expats

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