Is the Gov't letting the Peso Float? Or is the market catching up?

[Texas Bill]

The dollar has strengthed somewhat against the Euro in the last couple of days and tho' I don't speculate with my money, I would say that has a little to do with the exchange rate "wobbling" somewhat.
It remainsto be seen if the trend will continue, tho' I really don't want to see what happened a the end of El Hippo's Administration. The peso went wild in less than 6 months. From 16/1 way up to 50++/1 in what seemed like overnight.

[playacaribe2]

but it is manipulation nonetheless. The government sets the rate not the marketplace. Quite simply, the peso is not a freely tradeable currency. Were it "freely" traded on the major currency exchanges, the real rate (value) of the peso would be known. And I respectfully suggest, given the current state of the present economy, that it would be north of its present rate.

Respectfully,
Playacaribe2

Originally Posted by cobraboy

My guess is that the supply of dollars is lower. Businesses still need them to pay for goods and services with their primary trading partner. Rising gas prices in the US is causing less disposable income spending, and that effects the flow of US$ to the DR in two ways: 1) less travelers, and 2) fewer remittances from Dominicans in the US.

Supply and demand. Demand is stable (for now), but the supply of US$ is reduced.

There may be other factors involved, but the macro-level view comes down to that.

I got 34.35 @ Pichardo Cambio in Jarabacoa today.

BYW and FWIW: I totally discount the CB* manipulation conspiracy. Why? Because in a world where money changer work on razor-slim margins, there has been no black market developed for US$ or Euros. That is nearly always a symptom of money supply manipulation by a CB*.

















*Disclaimer: the use of CB ^^^above^^^ is not a reference to ~moi~, although I wish I could.

[Celt202]

Pichardo who either:

1) knows what he is talking about

or

2) is so full of **** his eyes are brown

has hinted that if the government allowed it the real exchange rate would be close to 50.

[cobraboy]

Originally Posted by playacaribe2

but it is manipulation nonetheless. The government sets the rate not the marketplace. Quite simply, the peso is not a freely tradeable currency. Were it "freely" traded on the major currency exchanges, the real rate (value) of the peso would be known. And I respectfully suggest, given the current state of the present economy, that it would be north of its present rate.

Respectfully,
Playacaribe2

"Money" is nothing more than the physical representation of exchange power. A 10% differential between what the gubmint values the dollar vs. peso, and what folks actually needing the dollar to conduct business value it would be immense. A black market either way would develop.

And it hasn't.

The CB needs to set the rate at the point necessary to insure it has the necessary amount in reserve for the country to pay it's dollar debts. The stasis of that figure is where the value should be set. If the value were lower than the market accepts, folks would not send dollars (remember, it represents value for goods and services) to the DR. If it were set too high, the flood of dollars would be staggering. Neither has happened.

[playacaribe2]

"The CB needs to set the rate at the point necessary to insure it has the necessary amount in reserve for the country to pay its dollar debts."

Since the conclusion of the IMF monitoring, the dollar reserves of the country have been reported to be steadily declining while the debt service burden has been steadily rising, without a corresponding increase in revenue. Regardless of whether your economic philosophy is based on Keynes, Galbraith, Smith or Marx, if this scenario continues, I find it hard to see anything but increased pressure on the exchange rate.

Note too, the lack of a black market does not necessarily mean a currency is correctly valued.


Respectfully,
Playacaribe2

Originally Posted by cobraboy

"Money" is nothing more than the physical representation of exchange power. A 10% differential between what the gubmint values the dollar vs. peso, and what folks actually needing the dollar to conduct business value it would be immense. A black market either way would develop.

And it hasn't.

The CB needs to set the rate at the point necessary to insure it has the necessary amount in reserve for the country to pay it's dollar debts. The stasis of that figure is where the value should be set. If the value were lower than the market accepts, folks would not send dollars (remember, it represents value for goods and services) to the DR. If it were set too high, the flood of dollars would be staggering. Neither has happened.

[Berzin]

Longterm I think it is really dangerous for the DR to have such a large percentage of the country's economy dependant on tourism and remittances.

With oil prices skyrocketing and airlines cutting routes and increasing airfares, the DR may want to re-think their dependence on this sector.

And in times of recession, the diaspora will not have the income to send back home like in previous times.

[cobraboy]

Originally Posted by playacaribe2

Note too, the lack of a black market does not necessarily mean a currency is correctly valued.


Respectfully,
Playacaribe2

True. But in a place where folks are scrambling to make a peso, surely a smart entrepreneur would take advantage of the real and artificial spread. Heck, there are cambios everywhere competing for a percentage point. You don't think a 10 point spread wouldn't have them dealing with the black market?

Human nature.

[cobraboy]

Originally Posted by Berzin

Longterm I think it is really dangerous for the DR to have such a large percentage of the country's economy dependant on tourism and remittances.

True. But what other resource could replace them?

[playacaribe2]

When the cambios, like the government, need dollars they raise the Peso/Dollar, Peso/Euro rate to attract same.

Market forces have not yet signaled loudly enough that the peso is overvalued versus the Dollar/Euro, so the perception by most is that the current rate is acceptable.

When that perception changes, most likely induced by a scarcity of Dollars/Euros, then you will start to see that black market thrive again. The litmus test will be when you attempt to change larger sums of pesos into dollars/euros and the bank does not have enough on hand (as happened in 2004). At that point a quasi black market will develop and, of course, the government will then try to talk up the peso. When that does not work, then they will order the cambios/money changers to adhere to an official rate of exchange. I believe that also occurred in the D.R. when the Mejia government stationed people outside the cambios to insure that pesos were exchanged at/near the quasi-official rate. And, that policy also failed.

It was only after several huge injections of Dollars (IMF) into the economy, did the peso finally start to normalize.

As has been pointed out previously, remittances and tourism are two of the three (FTZ's are the third) largest sources of Dollars/Euros for the D.R. Given the state of the economy in the US, and with parts of the EU experiencing a slowdown, it will be interesting to see this years statistics on the number of tourists and total remittances.



Respectfully,
Playacaribe2

Originally Posted by cobraboy

True. But in a place where folks are scrambling to make a peso, surely a smart entrepreneur would take advantage of the real and artificial spread. Heck, there are cambios everywhere competing for a percentage point. You don't think a 10 point spread wouldn't have them dealing with the black market?

Human nature.

[cobraboy]

Originally Posted by playacaribe2

When the cambios, like the government, need dollars they raise the Peso/Dollar, Peso/Euro rate to attract same.

Market forces have not yet signaled loudly enough that the peso is overvalued versus the Dollar/Euro, so the perception by most is that the current rate is acceptable.

Respectfully,
Playacaribe2

This is my point precisely. The market tends to be a lot more perceptive than gubmint does, and has no agenda.