USD versus Dominican Peso versus Euro

hugoke01

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Dec 31, 2004
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It's reallly amazing that while the dollar is gaining value against he Euro (expectations are that the US$ might gain slowly on more and more strength ) the peso gains more and more against the US$ .
How can the peso gain egainst the US$ while the Euro is loosing some strength?
I never realized that the Dominican economy is going better than the European one..
If this is a Dominican new governmental game it might one day go totally against them in a very hard way ..
I know that the topic of exchange rate has been discussed several times but it seems to me that now the government is loosing any common sense and have no longer any feeling for reality .. I think that this could become a dangerous game .


 

helpmann

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May 18, 2004
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My .0333 cents...

Although, this may not "jive" with the DR1 community, to me what the government is doing makes sense. Although the government could be trying to achieve a rate of exchange of 30 pesos to the dollar, through the buying of pesos (in exchange for dollars) on the open market (which is difficult and costly to do long-term), they may have just decided to reduce government spending (they're printing money at a much slower rate than before.)

If this is the case, good for them. It will make it easier for them to pay down US denominated debt and they will be able to attract more FDI, with a stable currency (a currency with an inflation rate that mimics the US.) The downside is that exports may severely decrease (they may have picked a FX rate that was too ambitious) and that they will most likely go into recession (similar to the US in the early '80s) because unemployment will rise. There isn't much you can do about it, unless you want to reduce unemployment (in the short-term like Hippo did, to try to get re-elected) through inflationary monetary and fiscal policies. Although, I am not in a favor of pegging one's currency to the US$ long-term (ala Argentina,) this may be the best short-term policy.

Any recent peso gains that deviate from the 30:1 ratio, are most likely attributed to the influx of Dominican-Americans around Semana Santa (exchange of US$ for pesos.) The peso always appears to appreciate during major holidays (Christmas, New Year's, Easter...)

What I don't understand is why prices on imports never adjusted with the appreciation of the peso?? Any thoughts??


My .0333 cents...
Helpmann
 

Escott

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helpmann said:
Although, this may not "jive" with the DR1 community, to me what the government is doing makes sense. Although the government could be trying to achieve a rate of exchange of 30 pesos to the dollar, through the buying of pesos (in exchange for dollars) on the open market (which is difficult and costly to do long-term), they may have just decided to reduce government spending (they're printing money at a much slower rate than before.)

If this is the case, good for them. It will make it easier for them to pay down US denominated debt and they will be able to attract more FDI, with a stable currency (a currency with an inflation rate that mimics the US.) The downside is that exports may severely decrease (they may have picked a FX rate that was too ambitious) and that they will most likely go into recession (similar to the US in the early '80s) because unemployment will rise. There isn't much you can do about it, unless you want to reduce unemployment (in the short-term like Hippo did, to try to get re-elected) through inflationary monetary and fiscal policies. Although, I am not in a favor of pegging one's currency to the US$ long-term (ala Argentina,) this may be the best short-term policy.

Any recent peso gains that deviate from the 30:1 ratio, are most likely attributed to the influx of Dominican-Americans around Semana Santa (exchange of US$ for pesos.) The peso always appears to appreciate during major holidays (Christmas, New Year's, Easter...)

What I don't understand is why prices on imports never adjusted with the appreciation of the peso?? Any thoughts??


My .0333 cents...
Helpmann
You think just Exports may decrease? You think TOURISM is going to hold up at twice the cost?

Manipulation can only work short term. I believe this is going to backfire and cause more grief than good for the DR. I just had dinner with a friend in NY last night and he hasn't come down to the DR in 6 months because of the cost. He would have been down twice by now. The long term effects of this will outlast the correction. If they made the Peso depreciate 30% tomorrow there will be a slowdown in Tourism and Exports for far longer. By the same token it takes time for exports and tourism to react to the strength of the Peso and hasn't taken a nose dive YET. It will. Then and only then will the country have to pay for the Governments nonsensical decisions.

VooDoo Economics didn't work for MCI so how can it work for the DR? Only problem is no one goes to jail for anything in the DR.
 

juanita

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Apr 22, 2004
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Just out of curiosity!

Were you all visiting the DR when the peso was at 17, before super Hippo took over???
 

Escott

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juanita said:
Were you all visiting the DR when the peso was at 17, before super Hippo took over???
Sure Juanita but there was a big difference then and that was the prices reflected the 17 pesos to a dollar. Same when it was 1 to 1. I was here in 70'.

Now you pay more for a six of Presidente beer than they are selling IMPORTED BEER in the US. What does being here when the peso was 17 have to do with anything?
 

Chris

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Oct 21, 2002
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helpmann said:
What I don't understand is why prices on imports never adjusted with the appreciation of the peso?? Any thoughts??
Because of the general increase in the total cost base of products. Moving them, stocking them, storing them, selling them etc etc. Also, no-one trusts the peso at the moment and that keeps prices still artifically high - profit taking is still happening by most vendors. I see car prices decreasing lately though.
 

helpmann

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May 18, 2004
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My .0333 cents x 2

Escott said:
You think just Exports may decrease? You think TOURISM is going to hold up at twice the cost?

Manipulation can only work short term. I believe this is going to backfire and cause more grief than good for the DR. I just had dinner with a friend in NY last night and he hasn't come down to the DR in 6 months because of the cost. He would have been down twice by now. The long term effects of this will outlast the correction. If they made the Peso depreciate 30% tomorrow there will be a slowdown in Tourism and Exports for far longer. By the same token it takes time for exports and tourism to react to the strength of the Peso and hasn't taken a nose dive YET. It will. Then and only then will the country have to pay for the Governments nonsensical decisions.

VooDoo Economics didn't work for MCI so how can it work for the DR? Only problem is no one goes to jail for anything in the DR.
I don't know what percentage of GDP comes from tourism, and I'm not sure how the government defines tourism. However, I am guessing that tourism is less of a percentage in the DR than it is in Jamaica, the Bahamas, Aruba, and the Virgin Islands, caribbean substitutes for "tourists" that offer comparable scenery at significantly higher rates. I do know that the majority of people that travel to the Dominican Republic are Dominicans and Dominican-Americans. Although, they may reduce their visits to the DR, they will most likely not substitute their visit with a vacation to a neighboring island. And because, Dominicans are heavily concentrated in two metropolitan areas, Miami and New York and are strongly increasing their numbers in these two cities, they have been able to benefit from low-fare flights from NYC and Miami to the DR, as airlines compete for their business (price themselves out of business. :))

So even if your own personal experience might lead you to believe that the drop in tourism will starve the DR, I think that the rate of travel will not affect the DR as much as a reduction in exports (sugar.) Dominicans (the overwhelming majority of the 'tourist' population) will continue to travel back home (NOT Aruba) and will have financial incentives (low airfares) to do so.

-Helpmann
 

helpmann

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Uggh?

Escott said:
VooDoo Economics didn't work for MCI so how can it work for the DR? Only problem is no one goes to jail for anything in the DR.
This doesn't make any sense.

Voodoo Economics (aka Trickle Down... aka Supply-Side Economics) is the belief that tax-cuts given to those in the higher income tax brackets (the rich) will use that money to invest, which will in turn create jobs, for the middle/working class w/o the need for government spending.

Voodoo economics has nothing to do with MCI or the peso peg in the DR (however it may have something to do with you personally, and the reasons why the DR has become too expensive for you.)

-Helpmann
 

helpmann

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Car Prices

Chris said:
Because of the general increase in the total cost base of products. Moving them, stocking them, storing them, selling them etc etc. Also, no-one trusts the peso at the moment and that keeps prices still artifically high - profit taking is still happening by most vendors. I see car prices decreasing lately though.
Thats good! Car prices are probably the best and most visible price indicators.

-Helpmann
 

Chris

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helpmann said:
Dominicans (the overwhelming majority of the 'tourist' population) will continue to travel back home (NOT Aruba) and will have financial incentives (low airfares) to do so.

-Helpmann
Right here at this sentence you're somewhat off the mark. Perhaps you could check up on tourist/traveller to the DR statistics.

Bolding mine..
 

Willie

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The people who are really feeling the pinch are those who are dependent on remittances from the US, may it be Social Security payments, or money from relatives. The effect of this is going to trickle down and it could get ugly.

Willie
 

Escott

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helpmann said:
This doesn't make any sense.

Voodoo Economics (aka Trickle Down... aka Supply-Side Economics) is the belief that tax-cuts given to those in the higher income tax brackets (the rich) will use that money to invest, which will in turn create jobs, for the middle/working class w/o the need for government spending.

Voodoo economics has nothing to do with MCI or the peso peg in the DR (however it may have something to do with you personally, and the reasons why the DR has become too expensive for you.)

-Helpmann
You figured me out already? They are passing a hat for me now in Sosua so I can eat upon my return tomorrow.

MCI cooked the books. The DR is artificially keeping the peso strong in order to exchange pesos for dollars to pay their outside interest bills. All this while free zones are tanking, tourism is still strong but will tank later in the year as people decide/realize how expensive it is now to come to the DR. They won't have any dollars to exchange for sometime in the near future.

Glad to see you are a Democrat also! LOL
 

Escott

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helpmann said:
So even if your own personal experience might lead you to believe that the drop in tourism will starve the DR, I think that the rate of travel will not affect the DR as much as a reduction in exports (sugar.) Dominicans (the overwhelming majority of the 'tourist' population) will continue to travel back home (NOT Aruba) and will have financial incentives (low airfares) to do so.-Helpmann
Prior to 9-11 just to give some sort of time frame every plane I was on to POP from JFK was 90-95% Dominicans. Now that Americans have discovered the DR it is now 90-95% Americans.



I argued your side of this arguement a few years ago but things have changed. Prior to 9-11 I could be in Rockys sitting with 20-25 gringos and I would be the only American, same situation today it is sometimes just the opposite. One of this, one of that and the rest are Americans today.

Look up threads about Cuba after Castro and how the DR would lose tourism to Cuba. I sounded just like you then. I felt that Americans didn't come to the DR and since all the other countries had the ability to already travel the DR would not feel the change.
Escott
 

helpmann

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A guess...

Escott said:
You figured me out already? They are passing a hat for me now in Sosua so I can eat upon my return tomorrow.

MCI cooked the books. The DR is artificially keeping the peso strong in order to exchange pesos for dollars to pay their outside interest bills. All this while free zones are tanking, tourism is still strong but will tank later in the year as people decide/realize how expensive it is now to come to the DR. They won't have any dollars to exchange for sometime in the near future.

Glad to see you are a Democrat also! LOL
Manipulation... artificial creation.... It's a peg! The DR has pegged their currency to the dollar at a rate of 30:1 and the President has already come out and said this. Many countries (especially third world countries) are or were pegged to the dollar. It's not that unusual for a country that has had severe inflationary problems to adopt a peg, in order to stabilize prices.

The problem, I assume that you're complaining about is not the rate of exchange, but the fact that prices have not adjusted since the adoption of the peg (I mean come on until 2003 the rate was avg. 16:1 for the last 5 years.) At a peg of 30:1, prices (of imported goods, which are many) should have decreased from summer 2004 (when the rate was 40:1.) Goods are approx. 30% too much. To compensate or to pay for now expensive goods, services have increased (or never adjusted downwards since summer 2004.)

Given, the past 18 months of inflationary problems, DR businesses believe that the 30:1 peg will not last; therefore, businesses have not lowered prices (that and they're probably recovering from 2004 losses or making out like bandits, I still have no idea.) Also, given the past performance of Leo's predecessor and the need for pesos for the start or completion of public works projects, DR businesses believe that the government can't stop spending for too long either.

Perhaps the FX was set too low, because businesses have yet to adjust the prices of their goods, but in time, as the 30:1 peg maintains, prices will have to adjust downwards. Regardless, the DR needs to institute a peg until they can practice better fiscal responsibility (unlike the US, which is spending like there is no tomorrow.) If the DR does end up like Argentina, and they are unable to maintain the peg or its US debt obligations, be ready.

Be ready to buy up some cheap real estate!!!

-Helpmann
 

chuckuindy

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juanita said:
Were you all visiting the DR when the peso was at 17, before super Hippo took over???
I remember being in the DR when the RDP was trading at 19 to 1USD. I was able to support 4 Dominican wives back then, now I am having trouble supporting one. I am however racking up more and more Western Union Gold Card Points.
 

Lurch

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Yes, however "pegging" a nation?s currency is not as simple as the boys at Funglode announcing an exchange rate and everyone living happily ever after. There are severe implications to the economy especially in this age of globalization, simply put competition for the very activities that the RD is involved in such as the value added industries in the FZs, agriculture and tourism.

This ?peg? is already the main cause of 20,000 jobs being eliminated in the FZ?s in the last 90 days. While that number may seem small remember this is a nation of only 9 million people +/- thus it would be the same as a larger market such as the USA (270 million people) losing 600,000 jobs in 90 days. This is only the beginning of this process and it has been increasing monthly.

The RD tourism market has always targeted the budget tourist (with variations). How is the RD going to compete with other more polished destinations now that a vacation will cost about the same or more than these other destinations? The RD certainly does not have the facilities or infrastructure for the upper end tourist market, and the location on the island with Haiti is not a marketing advantage. It seems quite logical that tourism or tourist spending will suffer, especially when those AI tourists refuse to leave the compound after seeing the prices in local restaurants and hotels.

I?ll leave out the bloated government payroll and IMF tax package for a later discussion. :sleep:
 

helpmann

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Hippo's Job Creation Plan

Lurch said:
Yes, however "pegging" a nation?s currency is not as simple as the boys at Funglode announcing an exchange rate and everyone living happily ever after. There are severe implications to the economy especially in this age of globalization, simply put competition for the very activities that the RD is involved in such as the value added industries in the FZs, agriculture and tourism.

This ?peg? is already the main cause of 20,000 jobs being eliminated in the FZ?s in the last 90 days. While that number may seem small remember this is a nation of only 9 million people +/- thus it would be the same as a larger market such as the USA (270 million people) losing 600,000 jobs in 90 days. This is only the beginning of this process and it has been increasing monthly.

The RD tourism market has always targeted the budget tourist (with variations). How is the RD going to compete with other more polished destinations now that a vacation will cost about the same or more than these other destinations? The RD certainly does not have the facilities or infrastructure for the upper end tourist market, and the location on the island with Haiti is not a marketing advantage. It seems quite logical that tourism or tourist spending will suffer, especially when those AI tourists refuse to leave the compound after seeing the prices in local restaurants and hotels.

I?ll leave out the bloated government payroll and IMF tax package for a later discussion. :sleep:
To blame the peg is silly, considering that those jobs were created under Hippo, as he sank the value of the peso. Anybody can create short-term job growth if they simply pump a ridiculous amount of money into the system.

-Helpmann
 

Escott

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helpmann said:
Manipulation... artificial creation.... It's a peg! The DR has pegged their currency to the dollar at a rate of 30:1 and the President has already come out and said this. Many countries (especially third world countries) are or were pegged to the dollar. It's not that unusual for a country that has had severe inflationary problems to adopt a peg, in order to stabilize prices.

The problem, I assume that you're complaining about is not the rate of exchange, but the fact that prices have not adjusted since the adoption of the peg (I mean come on until 2003 the rate was avg. 16:1 for the last 5 years.) At a peg of 30:1, prices (of imported goods, which are many) should have decreased from summer 2004 (when the rate was 40:1.) Goods are approx. 30% too much. To compensate or to pay for now expensive goods, services have increased (or never adjusted downwards since summer 2004.)

Given, the past 18 months of inflationary problems, DR businesses believe that the 30:1 peg will not last; therefore, businesses have not lowered prices (that and they're probably recovering from 2004 losses or making out like bandits, I still have no idea.) Also, given the past performance of Leo's predecessor and the need for pesos for the start or completion of public works projects, DR businesses believe that the government can't stop spending for too long either.

Perhaps the FX was set too low, because businesses have yet to adjust the prices of their goods, but in time, as the 30:1 peg maintains, prices will have to adjust downwards. Regardless, the DR needs to institute a peg until they can practice better fiscal responsibility (unlike the US, which is spending like there is no tomorrow.) If the DR does end up like Argentina, and they are unable to maintain the peg or its US debt obligations, be ready.

Be ready to buy up some cheap real estate!!!

-Helpmann
I agree with most of your post. However the Cheap Real Estate is the item I have the problem with. Most stuff is priced in US dollars on the North Coast and the DR is still the cheapest dirt in the Caribbean so... in times of uncertainty real estate becomes a safe haven as it did under Hippo. Prices have gone up since Hippo was well being Hippo. Before that the prices had been coming down for years and years.

You can't compare the DR to the US. Interest rates have been going down by leaps and bounds in the DR. In the US they are going North. Real Estate is usually affected by these changes to the positive for lower rates. Negatively for higher rates but maintain an upwards motion over all.

My biggest complaint is that in the local Supermarket a six of Presidente was 150 pesos at the end of August. Dollar was 48 to 1. End of October dollar was at 26/28 to 1 and six of beer was 180. Now that is a BIG difference and beer isn't the only thing affected.

I am not worried for myself. I can make do. Hell rice and beans has been my diet and I do well and have even gained weight. I have been growing my own beans, yuca and squash so life is real good now. It's the families that have a low wage that are hurting.

You can't pin a currency to another. That doesn't make sense especially when you need the other to pay bills. You can do things that will put pressure one way or the other on currency such as change interest rates, cut taxes and other things to speed up or slow down the economy. What this government is doing is swindling the masses by interferring with the currency market. It doesn't bode well for the country.

Also the rate didn't stay at 16 to 1 for 5 years. It had been a steady depreciation for many years and every month got more pesos for my dollar even when it was 16 to 1.

Escott
 

Lurch

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helpmann said:
To blame the peg is silly, considering that those jobs were created under Hippo, as he sank the value of the peso. Anybody can create short-term job growth if they simply pump a ridiculous amount of money into the system.

-Helpmann

I enjoyed the chuckle, but I seriously doubt you would find any supporting evidence that Mejia created anything, let alone real nonpolitical jobs. I stand corrected, I suspect there are a few new swiss bank accounts, perhaps a couple in the Caymans as well.

The FZ were in place before the PRD and their growth was not extraordinary, you would have to look back to the last PLD administration for extraordinary growth in the economy & FZs.

FZ's also do not target the domestic market, they are quite export driven thus "pumping" extra money into the domestic system would have a more muted effect.