official rate Q for Fred...

mondongo

Bronze
Jan 1, 2002
1,533
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Frederic, Would you please explain in some detail the move by the central bank to float the exchange rate? what short/long term effects will it have on the international competitiveness of DR production? Can you also explain what the different markets are for translating DR$ to US$? Is there a central place where one can go to get different bids/asks on the floating exchange rate? Is this done exlectronically, like the Nasdaq trades stocks?

thanks in advance, and apologies for the numerous questions
 

frederic

DR1 Expert
Jan 1, 2002
93
0
0
US$DOLLAR vs. RD$Peso

The move by the Central bank is CORRECT.

The RD$ Peso WAS overvalued by around 25%-30% when it was 16.67 pesos for a Dollar, which means it market value should be around 21.66. But there are many market forces acting on te exchange rate.

> 35% increase in the amount of pesos circulating
> Less demand for dollars for import
> Less supply of dollars from exports, tourism and remittances
> Capital flying into the country
> Foreign Investment increasing
> Higher interest rates in the DR than in US
> Low Inflation

These are only some of the forces in play and they do not particularly imply that the exchange rate will go all the way up to 21.66. These forces might keep it from making a correction or adjustment. So the wisest thing the Central Bank could do was to let it float so it reaches its real market level, since the Central Bank, nor anyone else, really knows what the real equilibrium market rate is.

for information on the different rates daily, weekly, monthly and yearly go to

www.bancentral.gov.do

where you will find this data and much more.
 

mondongo

Bronze
Jan 1, 2002
1,533
6
38
thanks for respoding,frederic

If the DR$ does fall by 30%, does that suggest possible inflation due to the corresponding increase in imported prices?


mondongo
 

frederic

DR1 Expert
Jan 1, 2002
93
0
0
Its the other way around

Its the other way around, its because the exchange rate does not reflect the previous loss of its internal purchasing power that a currency becomes "overvalued"; because its value outside is above its value inside.

On the other hand, inflation is the sustained increase in prices, not a one time price adjustment; so consequently, a devaluation WILL increase the prices of imported products, but that increase WILL NOT imply inflation, only a one time price increase.