The Future of the Dollar Exchange Rate Not so Bleek.

It’s good news for some, disappointing news for others: Paula Gutiérrez, President of Costa Rica’s Central Bank, believes that the U.S. dollar will not continue to lose value against the Costa Rican colón. Gutiérrez’s claim is backed by several facts, including fewer speculative capitals, a smaller increase in national exports, and larger purchases in dollars by Recope (the Costa Rica Petroleum Refiner). With less pressure for colón appreciation and a weaker economic situation in the United States, it would be very difficult to allow the dollar to continue its fall against Costa Rica’s currency.

Speculative capital represents the amount in dollars — or other foreign currency — that investors bring to Costa Rica, later to convert to colones and take advantage of local interest rates. When investors sell their dollars to a bank, the bank may either sell them to another bank or to the public - if it can do neither, it must sell them to the Central Bank. The Costa Rica Bank buys these dollars so that the dollar exchange rate doesn’t plummet to below the established rate due to desperate selling. After purchase, the Central Bank replaces the purchased dollars with “new” colones, that will in turn affect inflation.

Under the new system inaugurated on October 17, 2006, the dollar may fluctuate between a floor and a ceiling. The ceiling lowers each day by 6 cents: yesterday the rock-bottom rate was ¢492.15, and the ceiling was ¢569.07. With more investor capital, the rate stays closer to the bottom. The Central Bank lowered the colones rate last January in order to de-stimulate some of the dollar inflow, and stabilize the currency.

Another influential factor is exports, especially how many dollars Costa Rica receives in payment for its exported goods. Though there are still many exports, the amount of these dollars has begun to stagnate due to the United State’s impending recession. In 2008’s first trimester, national exports only increased 8%, as opposed to 2007’s 13%. The rate of exports is expected to decrease further.

On the other hand, Recope is demanding more dollars in order to purchase crude oil, which would benefit greatly from a stronger dollar. Gutiérrez explains that the Central Bank buys foreign currency from other central banks in order to prevent the dollar from falling too much, but has recently had to purchase more and more American dollars for Recope.

Recope believes that oil costs this year could run the country upwards of $2 trillion, a huge increase from 2007’s $1.435 trillion. Of course, the increase is not only due to the falling dollar, but to rising oil prices, in general. However, a stronger dollar in Costa Rica will go a long way to help absorb these increased costs.

Though Costa Rica has watched the dollar fall over the last few months, its tumble is likely coming to an end. Because of both domestic and international interests, it is in Costa Rica’s best interest to allow the dollar to stay where it is, or possibly grow stronger.

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Filed under: Travel on April 25th, 2008