The dollar has risen in price quite substantially in the domestic exchange market over the course of the first days of July. Faced with this situation, it is necessary to question its causes and also its consequences. In addition, it is important to analyze the mechanisms, instruments and goals of economic policy that can be deployed in the face of this situation.
In the field of causes, a first element to consider is undoubtedly the global inflation that has increased as a result of the war between Russia and Ukraine. This global inflation in food, fertilizers, fuels, to name a few goods, necessarily translates into domestic inflation in Chile and other developing countries. If all goods and services rise in price in the domestic market, the dollar also has to rise in price, if it is considered a good like any other. If that price were to lag behind, in a context of inflation, it would become a cheap commodity, at least in relative terms, which is why its demand would increase.
The other element to be considered, in the field of causes, is the increase in interest rates in international financial markets, as a result of the economic policy measures taken in the main developed countries. This rise in rates implies that the market of these countries becomes more attractive to the capitals that walk around the world in search of profitable investment opportunities, which therefore abandon the developing countries and generate an additional demand – or a lower supply of dollars – in the latter, which raises the price of the dollar in the exchange market of Chile and other developing countries.
Even if the war between Russia and Ukraine had never taken place, and the smallest supply of food goods in international markets was not present, the rise in interest rates in the United States and Europe would still have an inflationary effect on the price of the dollar in developing countries. If both phenomena are added together, the inflationary impact is even greater.
In Chile, in addition, the fall in the price of copper usually has an immediate impact on the increase in the price of the dollar. In reality, the drop in the price of the red metal does not have an immediate consequence on the availability of dollars in the country. That impact will manifest itself in the months to come. But the effect is immediate, for reasons rather speculative – or at least subjective – because those who assume that the supply of dollars will be lower in the near future rush to buy to profit from eventual price increases.
This increase in the price of the dollar can be reversed, reduced or at least stabilized through economic policy measures that are today the responsibility of the Central Bank. The BC may choose to leave the price of the dollar at high levels for a number of not necessarily bad effects that would occur. If you let the price of the dollar rise, imports will become more expensive and probably less abundant, many domestic goods would be favored, there would be some degree of import substitution and industrial growth, and capital outflows would be less incentivized than with a cheap dollar. Also those who have debts in dollars will see that that debt, expressed in pesos, has become heavier. Exports, in turn, would benefit. The cost of this policy would undoubtedly be a higher degree of inflation.
The other possibility is to gamble to lower the price of the dollar, for which it has to throw dollars on the market and reduce its international reserves, or increase its external indebtedness. This step encourages imports and discourages production for the domestic market, harms exporters, and favors those who take capital out of the country, since that process becomes cheaper. Inflation, in any case, will be lower, both because the prices of imports will not rise and because the sale of dollars will allow circulating to be collected.
In short, not everything is bad in the rise of the dollar and not everything is good with a cheap dollar. It all depends on the model of country or economic development that you have in mind. In any case, the corresponding policies have to be coordinated with the Executive, since it is necessary to order, complement – or in some cases compensate – the economic and social effects that take place, taking measures that escape the hands the Central Bank. In addition, since global industrialization or development policies are at stake, it is necessary that they be known in a clear and transparent way by all the social and economic agents of the country.
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The content expressed in this opinion column is the sole responsibility of its author, and does not necessarily reflect the editorial line or position of El Mostrador.
