The price of the dollar in Colombia has reached a new high; These are the forces due to which it is trading at the levels of 8 months ago.

The dollar exchange rate in Colombia is growing rapidly. Just on Thursday this week, its value jumped by 74 pesos to approach 4,176 pesos, its highest rate in 2024, moving it further and further away from being the most overvalued currency on the exchange just a few months ago. planet and directs it to the other extreme, to the most devalued. And it is not surprising that the current price of the American currency, which reached a maximum of 4193.5 pesos in the fourth session of the week, has not been observed since the end of October last year and there are several factors putting pressure on it. . up.

In fact, the value of one dollar in Colombia has risen by more than 412.5 pesos over the past three months, compared to the minimum rate recorded on March 10 of 3,763.43 pesos, amid pressures coming from abroad and the local environment itself, they say Foreigners. Foreign exchange market analysts were consulted.

The jump made this Thursday by the US currency was mainly due to higher interest rate differentials as other major economies began cutting rates, as well as mixed signals sent by the labor market in the United States, which recorded fewer requests for subsidies. two external factors with the greatest pressure.

At the same time, a rebound in imports of 18.1 percent, which widened the trade deficit, also put pressure on the exchange rate.

“Although currency pair movements in the region have been mixed, with the Mexican peso strengthening with (Claudia) Sheinbaum’s ministerial election fueling market optimism and the Brazilian real showing fairly strong movements, The local currency (peso) continues its upward trajectory, supported by the strength of the US dollar and import data that exceeds market expectations.“, indicated analysts from the commission agency Acciones & Valores.

“equivalent” effect

Given the dollar’s surge in the Colombian market, the peso is now among the currencies that have lost the most ground against the US currency, and many market analysts agree that the high percentage is due to the results of the recent elections in the Aztec region. a country.

Taking into account the closing rate of the day on Thursday, after the Japanese yen (12.65 percent), the Brazilian real (12.39 percent) and the Mexican peso (8.34 percent), the Colombian currency is among the most devalued currencies with 7.76 percent . until 2024.

Thus, the likelihood that the dollar will return to at least approximately the level of 3,760 pesos observed in March of this year is complicated in the current conditions of both domestic and foreign markets.

Juan David Ballen, director of analysis and strategy at brokerage firm Casa de Bolsa, says that at its last meeting, the United States central bank, the Federal Reserve (Fed), indicated that it could not cut rates as much as possible. expected in principle.

The announcement, according to the analyst, attracted investors to the dollar, especially as developing countries lower their interest rates. Except, Fiscal uncertainty in the region has increased following the results of Mexico’s presidential elections, and the Colombian government also faces difficulties in covering its budget deficit. “This set of factors contributed to the devaluation of currencies in Latin America,” including the peso, he explains.

Felipe Campos Salazar, investment and strategy manager of Grupo Alianza, says for his part that the main pull force for the dollar is the congressional elections in Mexico, mainly in which the current government has increased its majority and support, which increases the chances of holding announced reforms such as justice and regulatory reforms, the first of which aims to have judges elected by popular vote.

“This causes the Mexican peso to explode, and in Colombia the peso begins to move in the same direction as the Mexican currency. This explains 80 percent of the devaluation.”while internal elements such as financial nervousness helped no less because the financial issue is the driving channel between Mexico, Brazil and Colombia, where there was a lot of uncertainty affecting all markets,” says Campos.

Political uncertainty

The Bank of Columbia also forecasts that the peso will continue to weaken in the second half of 2024 to the point where the devaluation at the end of the year could be around 7 percent.

“The recent depreciation of the peso appears to be related to the political situation in Mexico, caused by the results of the presidential elections in that country and uncertainty regarding the approval of judicial reform in Congress, which caused nervousness in the markets, ended the strengthening of the Mexican currency and influenced the dynamics of currencies in the region,” bank analysts explain.

And they add that “although the Colombian peso’s correlation is below the historical average, highlights oil prices rising by about 9 percent in 2024 due to market tensions, the persistence of geopolitical tensions in the Middle East, the strength of the US economy and slight signs of improvement in China, which have led to increased demand for crude oil,” that is, regarding external factors.

Locally, downward pressure on the exchange rate comes from external accounts, according to Bancolombia’s economic team.

They say, for example, that Record levels of dollar remittances, strong net foreign capital inflows and a recent narrowing of the current account deficit due to trade deficit adjustments and lower corporate profit outflows have reduced the dependence of financial flows on the peso.

The expected narrowing of the Fed rate differential for the remainder of the year, high political uncertainty, and the expectation of a possible cut could be the determining factors in the process of peso devaluation in the second half of this year. .

“While the low level of current account deficit may explain the continued strength of the dollar, the normalization of cash flows, local uncertainty and the exhaustion of the carry trade strategy as a result of the closure of interest rate differentials will lead to the prevailing trend of peso depreciation in the second half of the year.” , they explain.

To the above elements, BBVA Research analysts add the expected narrowing of the Fed rate differential for the remainder of the year, high political uncertainty, especially in connection with discussions of structural reforms, as well as the expectation of a possible downgrade of the sovereign rating and a fiscal outlook with more serious problems.

For economists of Spanish education, given this panorama, it is clear to expect the exchange rate to be around 4,155 pesos at the end of 2024, with an average of 3,987 pesos for the whole year.

For its part, Bancolombia analysts say the exchange rate will average 4,140 pesos in the last quarter of 2024 and approach 4,012 pesos for the full year, which would represent a devaluation of about 7 percent compared to the 2023 average.

“In the medium term, the currency will return to the devaluation trend, in accordance with

normalization of monetary policy, evolution of the inflation differential between Colombia and the United States, and consideration of the uncertainty associated with local risks. We estimate that the exchange rate will average around P4,240 in 2025,” they note.