hugoke01 said:
I have a question for you :
What determines the exchange rate US$ versus Dominican Peso today ? Does this not require a continuous intervention of the Central Bank ( with great risks involved for the banking system and the people in the DR )
Many thanks
The exchange rate here is determined by the amount of dollars available in the banking system.
Remember, in the past, countries backed their currencies against a metal (usually gold or silver). Today, currencies are mostly fiat (legal tender simply because the government says it is, thus a legal tender cannot be redeem for any precious metal).
The way currency value is maintained is through using another stronger currency that is much more widely accepted worldwide in order to be able to purchase foreign products (such as US Dollars or Euros).
Depending on the total amount of US Dollars available at the central bank and independent banks nationwide and the amount being demanded, the price will be the equilibrium point between the supply and demand equation.
The central bank can only manipulate the exchange rate by either: buying or selling bonds and/or adjusting the interest rates which depending if the interest is adjusted up or down, the economy could either be flooded with dollars (or the dollars could leave the country: this is what was happening through the Hipolito years and due to the scarcity which became very severe, the price of the dollar skyrocketed from 16:1 when Hipolito started to well into the 50s).
After Leonel came to power, his previous proven record of responsible management of government finances and the economy overall (much more responsible than Hipolito) lead to an influx of money that was taken out of the country by panicked investors.
As the dollars started to flood into the banking system and the economy, the price of the dollar began to fall.
Usually, the flow of foreign capital into an economy remains rather constant, but when it abruptly changes (in the case of the DR, the flow dramatically increased in the first few months after Leonel took control again), the exchange rate began adjusting. The exchange rate has stabilized, meaning that the flow of dollars into the Dominican economy is more or less constant allowing for very minute changes in the exchange rates (remember, exchange rates are always changing), changes that are so small that its impact are not felt or even seen.
Many people continue to cling on the idea that the peso is overvalued, but I have found no evidence of such. The peso is floating against the dollar as freely as it was during the Hippo years, the difference now is a stable and much more sound government is in place compared to the chaotic fiasco we went through with Hippo.
In fact, we had no real government during Hippo's rule. The country was on a free fall with no resposibility being taken by anyone.
Today, of course, things are different.
Can you believe that we are going to end this year with one of the fastest growing economies in Latin America, again?!!
The years are surely coming back!!