Bloomberg Línea — The rapid advance of inflation at a global level and the economic uncertainty caused by Russia’s war in Ukraine made the US dollar a protagonist of the global economy during 2022.
Latin America was no stranger to this phenomenon, with sharp contrasts between the performance of its local currencies, with the Uruguayan peso appreciating 15.10% and the Argentine peso depreciating 41.14%, between December 31, 2021 and December 22, 2022, according to Bloomberg data.
“Global financial conditions have tightened, financial volatility has increased in both emerging and advanced economies, equity markets in much of the world have fallen sharply, risk appetite has declined, capital outflows from emerging markets have intensified and the dollar has appreciated significantly globally,” the Economic Commission for Latin America and the Caribbean (ECLAC) stated in its Preliminary Overview of the Economies of Latin America and the Caribbean 2022 report.
Although in the last weeks of 2022 the currencies of the region have performed better, the strength of the dollar has persisted.
For example, the LACI index, which tracks the performance of the region’s main currencies against the US dollar, has strengthened since mid-2022, after touching a low of 38.57 points on June 7, rising to 39.89 points on December 22, although its highs for the year are far from the current level (44.90 points).
Along with Uruguay, there are other currencies in the region that have won their battle against the US dollar during the year: the Brazilian real appreciated 7.79% in the period detailed above, while the Mexican peso also appreciated, by 4.95%, and the Peruvian sol has gained 4.79% against the US dollar this year.
Regarding the Mexican peso, analysts are viewing the currency as one of the most attractive in the region for 2023. JPMorgan Chase & Co. and Bank of America Corp. have touted the Mexican peso as the most attractive currency bet in Latin America, based on the country’s political and fiscal positions, still-high interest rates, and Mexico’s trade links to the United States.
“There is value in Mexico’s peso at current levels. I also like the local political story in Mexico at the moment, there is not much political risk on the peso,” wrote Brendan Mckenna, currency strategist at Wells Fargo in New York, and who expects the currency’s exchange rate to touch 19.50 per dollar in the coming months.
However, although there is strength in these three Latin American currencies, the greenback continues to lead in savings, global reserves and international trade, which is why it is seen as a safe haven asset.
ECLAC points out in its report that the importance of the dollar as the main international reserve currency and means of exchange supports the impact of the US monetary policy on global liquidity, since by 2020 and 2021 the dollar represented 60% of the world’s international reserves, while international reserves denominated in euros correspond to 21% of the global total, those denominated in yen to 6%, reserves denominated in pounds sterling represent 5% and those denominated in yuan 2%.
Currencies that lost ground against the US dollar in 2022
The Chilean peso and the Colombian peso also depreciated against the US dollar this year, by 2.46% and 14.31% respectively.
In Colombia, the average exchange rate went from 3,700 pesos to the US dollar at the beginning of the year to 5,000 pesos in recent weeks, stabilizing at around 4,750 on average per dollar in recent days.
“Among those who are suffering a negative impact are those who consume imported goods and those who must buy raw materials from abroad to carry out their production processes, and facing this context it will be important to seek efficiencies to attack the increase in costs and further streamline production processes,” Scotiabank Colpatria wrote in its December economic report.
“On the other hand, the sectors that benefited are those with a high intensity in the export of products and those who receive remittances,” it added.
The Argentine peso has suffered a strong depreciation, of 41.14% between December 31, 2021 and December 22, 2022, while the country battles with one of the highest inflation rates in the region, which between January and November reached was 85.3%, while year-on-year it climbed to 92.4%, according to the country’s statistics agency INDEC.
“Efforts to stabilize the exchange rate and reduce the impact of exchange rate volatility on macro-financial stability, including the second-order effect on inflation, have led some central banks in the region to actively use international reserves, which were reduced by 7.2% in the region as a whole” between January and November 2022, ECLAC said.
The euro and pound sterling also suffered significant depreciation this year against the dollar, mainly triggered by the war in Ukraine, which pushed up inflation and caused capital outflows in the midst of uncertainty due to sanctions against Russia.
The euro has lost 6.81% against the US dollar during the year, while pound sterling has depreciated 11.04% in the same period.