US dollar trades at highest level in three years

February 7, 2014

In the lead-up to national elections here and following news that the United States Federal Reserve would pull back economic stimulus, the U.S. dollar reached its highest point against the Costa Rican colón, the national currency, since October 2011.

The dollar strengthened nearly 5 percent since the first week of January when it sold for ₡506.73. As of Friday, the Central Bank’s (BCCR) Monex foreign currency market reported the dollar sold for ₡533.25.

Adriana Rodríguez, strategy chief for the securities firm ALDESA, told The Tico Times, “We do not believe the exchange rate will return to the level it was a month ago; it could increase even more.”

“We don’t see that what’s happening is a temporary thing”, she added.

Max Soto, director of the University of Costa Rica’s Institute for Economic Science Research, agreed.

Soto told The Tico Times that the colón’s trading near the band limit’s floor during the last several years was more a temporary result of the international financial crisis and foreign capital seeking better yields outside the United States and other industrialized economies than a reflection of the fundamentals of the Costa Rican economy.

The director said that he foresaw an “orderly, moderate” devaluation of the colón. He estimated that the colón could range between 500 and 530 depending on whether and when the state injected more dollars into the economy.

Soto added that the Central Bank had historically high reserves that it could mobilize to stabilize the exchange rate, if needed.

BCCR officials said the dollar began to strengthen after the Fed cut back stimulus spending this year. The Central Bank’s 2014-2015 Macroeconomic Plan, released Jan. 31, predicted a moderate depreciation of the colón against the dollar and a likely increase in interest rates in dollars and colones.

The Finance Ministry is expected to issue $1 billion in bonds in foreign markets, but not likely before the next presidential administration takes office in May, according to Soto. The latest bond issue was for $1 billion in April 2013.

Uncertainty about the upcoming second-round presidential election here also contributed to the recent volatility in the dollar, said Costa Rican Banking Association President Gilberto Serrano in an email to The Tico Times.

Opposition candidate Luis Guillermo Solís of the Citizen Action Party and Johnny Araya of the ruling National Liberation Party will face off in a runoff election April 6.

L. Arias contributed to this report. 

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