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  1. #1
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    Default Comments on Exchange Rate

    It is strange that the US dollar is losing strength everywhere in the world except in the DR, Peso has been between 31 and 33 for quite awhile???

    (Hlywood posted this on the exchange rate thread, but I thought it merited a thread of its own - so, I split it off.)
    Last edited by Chris; 05-25-2007 at 04:38 PM.

  2. #2
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    Yes, it is remarkable. Any comments from the economists or 'wanna-be' economists

  3. #3
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    By my opinion (and I don't want to think much and recall some courses' theories) depends on the linking and dependency of one country's economy to the economy of the USA and the currency interdependancy. Also depends on the currency basket a currency uses for exchange rate.

    Countries that do not have fully convertible exchange rates (such as DR) use currency baskets. To achieve full convertibilty, currency must have both internal and external convertibility. Internal convertibility means ability to echange freely from/to foreign currency within a country. External means - outside of country. DR Peso does have internal, but not external convertibility. It also uses a currency basket (mainly comprised of US Dollars. After reading what the currency basket is below, you will understand why the Peso rate has not changed much as compared to dollar as a free (fully convertible) currency (not using a currency basket) would.

    Currency basket:
    In the context of international exchange, currency baskets are in place particularly as an alternative to the fully convertible (free) rate of exchange in connection to an individual currency. The portion (and importance) of the currencies contained in the basket depends on their meaning for the committing country. The rates of exchange of the domestic currency in relation to the currencies contained in the basket then result proportionally into the rate of exchange of the inland currency to currencies outside the currency basket. A goal of the monetary policy is it to keep the course between inland currency and currency basket constant.

    This is an adjusted web translation.

    For example, Argentinean Peso has been the same over the last year (May 25, 2006 through May 25, 2007), 3.05 then, 3.08 now. The interlinking between Argentinean and US economy has bene long known, ever since Argentine peso was pegged to dollar at 1:1 up to 2002. Argentina also has internal convertibility, but not external one, and uses a currency basket mainly comprised of US Dollars.

    Brazilian Real got appreciated by 10% (2.128 then, 1.98 now).

    For FX history, look here
    FXHistory - Historical Currency Exchange Rates

    For Dominican peso, May 25, 2006 we were at 33.6, today we're at 32.6

    All these are interbank exchange rates. For RDP, to get actual rate, discount 0.5 points to 0.6 points from the published rate.

    Also, note, Euro appreciated 7% against dollar in last year (May 25, 2006 to May 25, 2007) from 1.27 to 1.36, whereaes about listed Peso rate only adjusted 3%. Compare, however, Brazilian Real that adjusted 10%.

    Anyone interested in learning more about exchange rates
    Exchange rate - Wikipedia, the free encyclopedia
    Last edited by rubio_higuey; 05-26-2007 at 11:48 AM.

  4. #4
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    As I cannot no longer add/modify:

    In context of peso/dollar and convertibility, because it has only internal convertibility, it is the internal (local) market that determines peso/dollar exchange rate, by means of supply and demand of both pesos and dollars. It is not the external (international market) that affects the peso/dollar exchange rate. So, for example, an inflation in Russia or deflation in Japan would not have any (or if any, only very marginal) impact on peso/dollar exchange rate. On the other hand, it would have effect on dollar/euro rate, which are fully convertible and tradeable internationally.

    In effect, having non-convertible currencies and using currency baskets (as ooposed to free float) allow the currency to be cushioned from external factors possibly affecting exchange rate, and allow the central bank to more easily manipulate the currency exchange rate by buying/selling the local currency or dollars, in addition to having other monetary tools (such as increase/decrease in interest rates) at their disposal. Can you imagine US Fed trying to buy dollars on an international market (London, Frankfurt, Hong Kong, Sydney, Tokyo, New York, Chicago at the same time) to affect the dollar/euro exchange rate? It's much easily done in a closed environment (local market only).

  5. #5
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    Another post:

    WHY the DR government SHOULD NOT be interested in a peso/dollar rate lowering (peso appreciating)?

    My thoughts:

    - Lowered incomes from money transfers (remesas). At lower rate, same money sent result in less money received in DR.
    - Lowered incomes from tourism. At lower rate, same money paid lowers in less money gotten by hotels, travel agents, etc in DR. Because costs are in DR pesos, it is not convenient that the exchnage rate is lower, because to pay for the same costs less revenue is received.
    - Products exported become less competitive. I don't know of what are the products DR exports (probably some agricultural products). But at lower rate of exchange, same thing as tourism happens. Costs and production is in pesos, but selling price in dollars, so the same product exported receives less revenue in pesos for producer if the producre keeps the same dollar price. If the producer wants to keep the same revenue in pesos, he has to increase the dollar selling price, thus his product becomes less competitive price-wise.
    - Loads of debt being taken in. Because government takes a lot of foreign debt in (Metro, etc.) and private companies take loads of debt to finance private projects (Cap cana, the Ede-s, etc.) the dollars raised and received convert to less pesos if exchange rate between peso/dollar is lower.

    Now to PAY for foreign debt (installment, and interest), even with the same exchnage rate, the government has means to "scam" the market and pay cheaper, it can lower the exchange rate artificially by means of affecting demand and supply, for a short period of time, such as to buy cheap dollars and pay the obligations based in dollars, using less pesos. This, however, is temporary observance and then the rate is "re-adjusted".

    As long as DR has huge incomes from tourism, as long as many transfers come in, and as long as government keeps taking on debt, the rate to dollar PROBABLY WOULD NOT be affected much, even if euro to dollar was 1:2.

    But don't take this as a prediction of how the peso/dollar rate would do or where woudl it go. It is my personal opinion why the government SHOULD NOT let the peso/dollar rate go much lower than it is now.

  6. #6
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    Great information, thanks for taking the time to write this all down.

  7. #7
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    Supply and demand.

    A few things are happening:

    -The US is making money laundering much more difficult since 9/11. Many cartels in cocaine, ganja and heroin are using Euros as the currency of choice. We're talkning in terms of many billions in M1, real paper currency.

    -Politicallly, there is a punitive move by some oil producers to pay in currencies other than dollars. The US is being economically "punished" for their involvement in the ME. Heck, even Venezuela is threatening to require payment in Euros as their currency of choice.

    -The rise of the economies of China and India who are the recipients of outsourcing from Europe, increasing the demand for trade in Euros. The Euro is becoming a popular currency. The EU, so far, is solidifying and consolidating the economies if European countries making their currencies more easily accepted. Wheras a Chinese company formerly wanted to be paid in Dollars instead of, for instance, francs or lira, the Euro is now equally accepted. This lowers the demand of dollars.

    -The spike in US debt to pay for the war in Iraq and Afghanistan. Internally, US tax revenues are at all time highs, per capita, due to a strong economy, and the debt increase is on a sharp decline.

    Of course, there is just no one reason. But you can see how the demand side of the equation has been affected. World events can certainly effect the exchange equilibrium very quickly.

  8. #8
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    Funny thing is how the countires most worried about further decline of the dollar vis a vis their currency seem to be 'The EU' and China, not 'the Feds'..

  9. #9
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    Just my 2 cents, cobraboy's information mainly deals with exchange rates dollar/euro and explanation why the euro has risen, whereas my information deals with exchange rate peso/dollar and explanation why the peso has remained the same.

  10. #10
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    Thanks Rubio,
    I had a lot of comments but you said them all, there is nothing to add. One heavy reason of goverment is to manage somehow to pay foreign debts (and new ones, too) and it is like rope dancing, trying to keep balance.

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