The dollar has been declining steadily in Latin America, but that trend is starting to change. The main reason for the dollar’s strength is the weakening of other currencies such as the Argentine peso and Brazilian real. As these countries struggle with inflation, their governments are looking for ways to stabilize their economies without losing control over currency value.
Latin America is a region that includes countries in South and Central America, Mexico, the Caribbean, and the Spanish-speaking countries of the United States. The “Dollar’s Strength Defied in Latin America” is referring to how the dollar has been falling in these countries since Donald Trump was elected president.
Latin America is one region where the US dollar hasn’t seen significant advances this year.
Brazilian and Uruguayan currencies have bucked the dollar’s widespread gain. Through almost three months of 2022, the Brazilian real has climbed more than 17% versus the dollar, making it the world’s best performer. The pesos of Chile and Uruguay are up approximately 9.5 percent and 7.4 percent, respectively, while the peso of Mexico is up about 2.4 percent.
To put things in perspective, the US dollar is up versus almost three-quarters of the major currencies monitored by The Wall Street Journal this year.
The rise in commodity prices will be one source of support for developing markets in 2022. This has helped emerging-market assets rebound following a pandemic-era meltdown, benefiting countries that depend heavily on raw-material exports.
Emerging market central bankers have also led the global drive to boost interest rates in an attempt to curb inflation. Many started in early 2021, when the Federal Reserve, the United States’ central bank, was still referring to inflation as “temporary” and sustaining massive stimulus programs.
Higher interest rates entice investors looking for big profits. They sell currencies with lower yields or a lesser likelihood of increasing rates, then purchase the local currency and invest in local assets.
The Central Bank of Brazil increased its benchmark rate by one percentage point to 11.75 percent in mid-March, after raising it by eight percentage points since March 2021.
Since starting a tightening cycle in July, Chilean policymakers have hiked borrowing rates by 5 percentage points, including a 1.5-percentage-point rise at the monetary-policy committee’s most recent meeting.
According to economists, the rush into Latin American currencies demonstrates a general improvement in policymakers’ budgetary and monetary discipline.
“Brazil’s central bank is often seen as one of the most responsive in the area, eager to go to greater measures to create confidence and lower consumer pricing expectations,” according to Karl Schamotta, chief market analyst at payments processor Corpay.
Mr. Schamotta claims that this has boosted stocks in the nation since more investors have made long bets on the country’s currency rising in value. More foreign investment in Brazil’s stock market has resulted as a result of this, he noted.
Foreign investors benefit from a stronger real or peso since stock markets trade in local currency.
The president of the Central Bank of Brazil, Roberto Campos Neto, hiked the benchmark rate by one percentage point in mid-March.
Shutterstock photo by joedson alves
Brazil’s Bovespa, Chile’s IPSA and Mexico’s IPC are three of the four best-performing stock indexes in the world this year, up 14.5%, 14.1% and 5.3%, respectively. In contrast, the S&P 500 has lost 2.8% and the pan-European benchmark Stoxx 600 is down 5.3%.
Many Latin American and emerging-market countries’ leaders are “far more mature,” with “a lot more experience handling higher rates, greater inflation, and better fiscal management.” “These countries have learnt from their previous errors,” said Columbia Threadneedle’s senior global rates strategist, Ed Al-Hussainy. “We’re entering a Fed tightening cycle where there are simply a lot more grownups in the room,” he remarked.
Inflation has a long history in emerging nations, particularly Latin America, although central banks’ responses have varied. Some central banks have hiked rates as soon as prices begin to rise, while others have allowed inflation to soar because a weak currency aided exporters and boosted nominal GDP.
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The rebound in Latin American assets comes as China’s economy slows and the Federal Reserve raises interest rates in the United States, both of which have previously thrown emerging-market investments into disarray.
Last year, the value of the US dollar increased to its highest level since 2015. This is wonderful news for many American consumers, but it may hurt equities and the economy. Dion Rabouin of the Wall Street Journal explains. Sebastian Vega/WSJ photo illustration
Emerging markets have consistently lagged US stocks and equivalent high-yield bonds for more than a decade, producing notably low returns when US rates increase. When big emerging nations suffer problems, such as Russia’s conflict in Ukraine and Turkey’s currency crisis, investors have a tendency to sell.
Mr. Al-Hussainy believes that the fact that a few developing nations have so far provided significant returns in the face of such hurdles indicates that emerging-market investment is evolving. This is partly due to the fact that local investors in countries such as Peru, Colombia, Mexico, and Brazil “move the needle considerably more than we do at this level,” he said.
“Foreign investors have stayed away from this surge this year because the dollar has been so volatile.” ‘Well, the dollar is going to be stronger,’ some reasoned. In such atmosphere, why should I invest in [developing markets]?’ That was a blunder.”
The Brazilian Central Bank is located in Braslia. In 2022, the real of Brazil will be one of many Latin American currencies to climb versus the dollar.
Andressa Anholete/Bloomberg News photo
Dion Rabouin can be reached at [email protected]
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