SAN FRANCISCO (MarketWatch) — Latin American currencies are on fire across the region. The Colombian peso, the Mexican peso and the Brazilian real are some of the strongest global currencies against the U.S. dollar this year.
On Feb. 2, the Brazilian real advanced to 1.7254 per U.S. dollar, the strongest since Nov. 4.
Since February 2009, the real has gained 34 percent, making it one of the world’s best performing currencies against the dollar. The Colombian peso is up 7.7% this year alone against the dollar to 1.795, and the Mexican peso, at 12.08, is not far behind.
On the surface, the stronger currencies are a testament to stronger economies in Latin America, and a weaker economy in the United States.
Latin America ‘s economic growth this year is not exactly fast relative to past years — it is expected to grow just 3.7% in 2012, down from 4.3% in 2011 — but that growth is fast when compared with the United States, where growth is expected to slow to 1.9% in the first quarter, according to the latest MarketWatch forecast.
Strong growth touted
To be sure, governments in these countries have touted their economic policies as proof that things are getting better in the region. Even Wall Street economists have joined the bandwagon, steering investors to emerging markets.
But while strong currencies are good for some companies and some parts of the economy, they are a negative for exporters and a nightmare for those trying to manage monetary policy.
And in a way, it is not so much the stronger economies that are driving the strengthening of currencies as it is foreign investments in equities and other assets in Latin America.
“Beyond what the central bank already does, there isn’t much more than can be done,” Brazilian Trade Minister Fernando Pimentel said this week. “There’s a limit to our capacity to prevent this appreciation of the real.”
Exporters are already suffering from the appreciation of Latin America currencies. Companies like Vale SA (VALE) VALE
-0.66% ,Compania de Minas Buenaventura SAA
BVN
-0.43% and Southern Copper Corp.
SCCO
-0.85% are all in danger of signing fewer
contracts at lower prices, or having contracts renegotiated, as buyers seek other commodity producers elsewhere.
This is threatening to derail even further the commodities industry, which for the past decade has been the lifeblood of most of Latin America. Even industrial manufacturers are feeling the brunt, such as Brazilian aircraft maker Embraer ERJ
+1.75% .
The rising currencies have affected trade globally, not just with the United States. China last year became Brazil’s largest trade partner, overtaking the United States, and the weak euro has affected trade across that region too.
Protective sentiment
The rising currencies have also prompted an increase in protectionist sentiment in Latin America.
Walls have come down over the past decade, as the commodities boom thrived and prompted Latin American countries to lower tariffs in exchange for better treatment of their commodities overseas. Now, some countries are beginning to inch back toward protectionism.
Argentina, for example, has limited everything from appliances to computer parts from entering the country to give local makers a competitive edge over imported parts.
To be sure, rising currencies help monetary policy makers to better control inflation by keeping prices lower. But as Pimentel points out, what other tools can monetary policy makers use to control rising currencies?
The question is how much stronger can the Latin American currencies get this year. Foreign flows into the region show no signs of stopping, and monetary policy makers are unable — or unwilling — to do anything about the strengthening currencies.
Brazilian President Dilma Rousseff has said she wants to keep interest rates in Brazil lower, which should make Brazilian bonds less attractive to foreign investors. The problem is that interest rates keep going down in other countries too.
marketwatch.com
On Feb. 2, the Brazilian real advanced to 1.7254 per U.S. dollar, the strongest since Nov. 4.
Since February 2009, the real has gained 34 percent, making it one of the world’s best performing currencies against the dollar. The Colombian peso is up 7.7% this year alone against the dollar to 1.795, and the Mexican peso, at 12.08, is not far behind.
On the surface, the stronger currencies are a testament to stronger economies in Latin America, and a weaker economy in the United States.
Latin America ‘s economic growth this year is not exactly fast relative to past years — it is expected to grow just 3.7% in 2012, down from 4.3% in 2011 — but that growth is fast when compared with the United States, where growth is expected to slow to 1.9% in the first quarter, according to the latest MarketWatch forecast.
Strong growth touted
To be sure, governments in these countries have touted their economic policies as proof that things are getting better in the region. Even Wall Street economists have joined the bandwagon, steering investors to emerging markets.
But while strong currencies are good for some companies and some parts of the economy, they are a negative for exporters and a nightmare for those trying to manage monetary policy.
And in a way, it is not so much the stronger economies that are driving the strengthening of currencies as it is foreign investments in equities and other assets in Latin America.
“Beyond what the central bank already does, there isn’t much more than can be done,” Brazilian Trade Minister Fernando Pimentel said this week. “There’s a limit to our capacity to prevent this appreciation of the real.”
Exporters are already suffering from the appreciation of Latin America currencies. Companies like Vale SA (VALE) VALE
-0.66% ,Compania de Minas Buenaventura SAA
BVN
-0.43% and Southern Copper Corp.
SCCO
-0.85% are all in danger of signing fewer
contracts at lower prices, or having contracts renegotiated, as buyers seek other commodity producers elsewhere.
This is threatening to derail even further the commodities industry, which for the past decade has been the lifeblood of most of Latin America. Even industrial manufacturers are feeling the brunt, such as Brazilian aircraft maker Embraer ERJ
+1.75% .
The rising currencies have affected trade globally, not just with the United States. China last year became Brazil’s largest trade partner, overtaking the United States, and the weak euro has affected trade across that region too.
Protective sentiment
The rising currencies have also prompted an increase in protectionist sentiment in Latin America.
Walls have come down over the past decade, as the commodities boom thrived and prompted Latin American countries to lower tariffs in exchange for better treatment of their commodities overseas. Now, some countries are beginning to inch back toward protectionism.
Argentina, for example, has limited everything from appliances to computer parts from entering the country to give local makers a competitive edge over imported parts.
To be sure, rising currencies help monetary policy makers to better control inflation by keeping prices lower. But as Pimentel points out, what other tools can monetary policy makers use to control rising currencies?
The question is how much stronger can the Latin American currencies get this year. Foreign flows into the region show no signs of stopping, and monetary policy makers are unable — or unwilling — to do anything about the strengthening currencies.
Brazilian President Dilma Rousseff has said she wants to keep interest rates in Brazil lower, which should make Brazilian bonds less attractive to foreign investors. The problem is that interest rates keep going down in other countries too.
marketwatch.com
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