San José, Costa Rica, since 1956

Colón stronger as dollar nears all-time low

The U.S. dollar is hurting, and the once atrophied colón is starting to get a little bit of muscle.

As of Thursday, the value of a U.S. dollar was ₡493, the strongest the colón has been since 2008 and about the same value it had in 2006, when Costa Rica’s Central Bank (BCCR) implemented a fluctuating band system and scrapped fixed daily mini-devaluations.

The dollar has steadily declined in 2011. According to the Wall Street Journal’s U.S. Dollar Index, created in 1971, the dollar is currently only 5 percent shy of its lowest ever-recorded value, which was in March 2008. On March 1, 2008, the dollar was also valued at ₡493 before hitting its lowest mark of ₡491 by the end of the month.

In an interview with the Wall Street Journal last week, Alessio de Longis, who overseas the Oppenheimer Currency Opportunities Fund, said, “The dollar just hasn’t had anything positive going for it.”

In Costa Rica, the result has been an almost immoveable exchange rate and frustration among industries that rely on the dollar. Two weeks ago, 150 members of the Association for the Protection of Tourism, or PROTUR, a group of Costa Rican tourism industry owners, traveled to the Legislative Assembly in downtown San José to voice concerns about the sector, which is fueled almost entirely by U.S dollars. This week, PROTUR released a list of their chief concerns, and first on that list was the exchange rate.

“The exchange rate is absolutely hammering us,” said Boris Marchegiani, president of PROTUR and owner of the Gaia Hotel and Reserve in Manuel Antonio. “Every dollar we earn is worth fewer colones, which is what we use to pay employees, services and most other fees.”

While the exchange rate continues to punish dollar-reliant industries, the BCCR has been forced to buy dollars with colones in the national market to keep the rate from falling further. The BCCR’s intervention in the market has kept the exchange rate around the ₡495-500 level during the first four months of the year, as opposed to the traditional 2, 3 and 6 colón daily jumps seen in previous years.

From Feb. 1, 2010 to May 1, 2010, for example, the value of the colón appreciated ₡50 against the dollar, moving from a value of ₡555 to ₡505. During the same three-month span this year the exchange rate fluctuated only ₡6 from ₡499 on Feb. 1 to Thursday’s value of ₡493.

In the 118 days thus far in 2011, the exchange rate has moved an average of 0.14 colones per day.

“The main reason the exchange rate has moved very little is because the BCCR is buying almost all of the dollars at the lower band. There is almost no one demanding dollars in the national market. The demand for dollars in Costa Rica is very, very low,” Juan Pablo Segura a trader for the financial consulting firm Aldesa told The Tico Times. “If the BCCR wasn’t buying the dollars, the exchange rate might be falling even further below the 495 amount.” 

Will the exchange rate go back up?

The Costa Rican exchange rate, like the international economic landscape, is cyclical. If the low-point of the U.S. dollar in 2008 was an indication of what is to come, greenbacks should start to make a comeback in coming months.

In his first-ever press conference Wednesday, Ben Bernanke, chairman of the U.S. Federal Reserve, said the Federal Open Market Committee found that the U.S. economy is recovering at a “moderate pace” from the 2008-2009 financial crisis.

“Information received since the Federal Open Market Committee met in March indicates that economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually,” Bernanke said to open the conference. 

Bernanke said the committee’s primary focus in the year would be to keep inflation low and to reduce unemployment.

“The committee seeks to foster maximum employment and price stability,” he said, adding that the committee “will employ its policy tools as necessary to support the economic recovery.”

Bernanke’s cautious words about a moderate recovery signify very little in the short-term, and according to Segura, Costa Rican banks are still reluctant to hold onto excessive reserves of the depressed dollar.

“National commercial banks are not holding very many dollars right now. I am speculating on this, but it doesn’t seem that banks think the dollar is going to rise in the near term,” Segura said. “What they need is what is demanded by the consumers and right now that is colones. Banks tend to try to avoid holding dollars until the exchange rate begins to move in the other direction.”

In the meantime, Costa Rican industries that rely on the U.S. dollar, such as tourism, imports, foreign companies and real estate, will just keep watching the exchange rate on a daily basis, hoping ₡493 is as low as it gets.

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