Colón Gets Up Off the Floor

October 26, 2007

The colón exchange rate has finally started to float – at least for now. For the past three weeks, the value of the Costa Rican colón against the U.S. dollar on the Monex market (a kind of wholesale currency exchange for financial institutions) has floated above the 519.16 floor set by the Central Bank, without any intervention from the bank.

This marks the first time period that the currency has floated freely between the floor and ceiling exchange rates set by the Central Bank more than a year ago.

Before now, the colón had simply remained stuck to the floor, requiring constant intervention from the Central Bank through the purchase of dollars with colones to keep the colón from gaining value.

That’s something the Central Bank must be careful of because if the value of the colón increases too much against the dollar it puts Costa Rican export manufacturers at a disadvantage:

They will make the same amount of dollars from exports abroad, yet those dollars will convert into fewer colones at home.

The current situation means there are not too many U.S. dollars sloshing around the Costa Rican economy, said Central Bank Economist Eduardo Prado.

Prado cautioned, however, that things could change in the next few months, when dollars from year-end exports and increased tourist traffic come rolling in. In that case, Prado said, the Central Bank may have to go back to some intervention in the market. “You can’t discard that possibility,” Prado said.

 

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