Latin America Advisor

A Daily Publication of The Dialogue

What Does a Strong U.S. Dollar Mean for Latin America?

President-elect Lenín Moreno of Ecuador, with its dollarized economy, faces perhaps the most negative consequences among Latin American countries resulting from the strong value of the U.S. dollar.

In January, U.S. President Donald Trump said the U.S. dollar was “too strong,” a departure from the past practice of U.S. presidents, who tried to avoid making such statements and influencing currency markets. How is the U.S. dollar’s relative strength affecting Latin American and Caribbean economies, and what would a weaker dollar mean for the region? Which countries are benefiting the most from the dollar’s strength? How are dollarized economies, such as Ecuador, faring with a strong dollar? What are the biggest trends for the region this year with regard to foreign exchange?

Uri Dadush, senior fellow at OCP Policy Center and non-resident scholar at Bruegel: "Viewed in isolation, a strong dollar is good for Latin American and Caribbean exporters and families that receive remittances, but bad for most consumers, as well as for governments and for companies with large unhedged dollar debt. The net effect varies across countries. I suspect that it is positive for Mexico, for example, because it exports much more than it imports from the United States and receives substantial remittances. However, the effect of the high dollar should not be looked at in isolation. Currently, the dollar is strong because the U.S. economy is recovering solidly, so this adds to the high dollar’s positives for Mexico and for Latin America and the Caribbean more broadly. However, the dollar has appreciated against nearly all currencies, so for most Latin American and Caribbean countries, the positive competitive effects of a high dollar are much less than what meets the eye. Ecuador, which is dollarized, is the worst-hit by the high dollar, as it can only adjust to the collapse of the price of its oil exports by cutting spending, not by devaluing. Countries that allow their exchange rate to float and that have modest amounts of unhedged dollar debt are the least affected by the high dollar."

Jose M. Barrionuevo, managing member and CEO at Sailbridge Capital: "President Trump’s comments that the U.S. dollar is ‘too strong’ are unusual, as U.S. policy has consistently focused on attracting capital to strengthen investment and growth. If the Trump administration is successful in improving growth, it would be because it was able to jump-start investment amid a stable or stronger dollar. The strong U.S. dollar would thus be based on strengthening investment and growth, which would eventually strengthen Latin American currencies, as U.S. demand for commodities and imports of goods and services would rise. The countries that benefit most are the ones that can attract the most capital inflows, especially if the inflows strengthen private investment. Mexico is, in our view, the country that stands to benefit the most from stronger U.S. growth and improved investment prospects. As the U.S. dollar strengthens, however, the countries that risk falling into a sharp recession are the ones that have the least currency adjustment, notably Ecuador, as the adjustment takes place through much weaker growth and unemployment. As always, the United States remains the biggest driver of opportunities for the world and, of course, for Latin America. The biggest trends for the region are the prospects of, first, lower commodity prices, weaker investment and some capital outflows that follow the strengthening investment opportunities in the United States. Second, the prospect of higher U.S. interest rates would reinforce currency pressures and, in fact, could exacerbate them if U.S. growth begins to pick up more rapidly in the second half of the year and in 2018. These two are associated with depreciating Latin American currencies. Once U.S. growth strengthens toward the 3 percent mark, commodity prices and opportunities in the region would recover markedly, especially once the Fed is done with its tightening cycle in 2018, leading to capital flows to Latin America and appreciating currencies."

Claudio M. Loser, president of Centennial Group Latin America and former head of the Western Hemisphere Department of the International Monetary Fund: "In order to review the so-called excessive strength of the U.S. dollar, we should look at the movements of the real effective exchange rate (REER). This is the standard measurement of the strength of a currency, and takes into account exchange rates and inflation relative to other countries. On that basis, the U.S. dollar has only strengthened in value by 4 percent in the last six months, and 5 percent in the last year. The Chinese Yuan also strengthened, while little happened to the Euro. Among Latin American major countries, most REERs have moved very little in recent months, except for a ridiculous gain in the case of Venezuela, due to hyperinflation and a fixed exchange rate, and Argentina, to a lesser but important degree. Mexico’s currency experienced a real devaluation of around 12 percent in the last half year, following Trump’s accession to the presidency, but followed a trend that started long ago. In general, currencies had lost value for their own reasons. Brazil suffered from its own crisis and was affected by lower commodity prices. The latter also affected the currencies of other South American countries. As to possible efforts to ‘weaken’ the U.S. dollar, two final considerations: 1) the authorities may try, but experience shows that they can do little in terms of its real value; and 2) the majority of Latin American countries will follow the U.S. dollar, becoming more competitive if the U.S. succeeds."

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