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what happens to the dollar in Colombia when there is a recession in the United States

Recession is usually a frightening word and the United States confirmed that its economy entered that thick sea that implies that the consumption of goods and services contracts, investment decreases, production falls and the latent risk of job layoffs appears, wages and a whole sequence of economic events, all bad.

It happened in the United States: two consecutive quarters of economic contraction that were known from preliminary figures, which have now been confirmed.

The Federal Reserve squeeze on interest ratesprecisely to try to control inflation that reached historical levels in June, had to do with the arrival of the dreaded recession.

In the following months, July and August, prices began to drop and inflation stood at 8.5% in the seventh month of the year and 8.3% in August. However, the Fed remains willing to continue applying monetary policy, which already has interest rates in a range of 3% to 3.25%, until the job (of lowering inflation) is finished, according to the signs that delivered Jerome Powell, chairman of the Federal Reserve.

In this context, the recession, that although it might be thought that it should already be entering less turbulent waters, the risk had been known for a couple of monthsSurely it will not be so temporary. Pressure situations continue, such as the war between Russia and Ukraine, which has led the World Bank to also fear a recession in the Eurozone.

currency appreciates

As the dollar is the currency with which almost half of the transactions in the world are made, it does not escape a recession in the United States. In fact, in recent days the currency has been mired in volatility, but, fundamentally, with an appreciation trend.

This was confirmed by José Ignacio López, director of economic research at Corficolombiana. “When there is a recession in the United States, the dollar appreciates (that is, its value increases and the holder can buy more with the same silver) against most world currencies,” and the Colombian peso is no exception. In fact, this Friday, the US currency exceeded the barrier of 4,600 pesos and traded at a maximum of 4,615.50 pesos.

Several gas stations in the state of Florida are supplying gasoline and water to residents who approach them
Several gas stations in the state of Florida are supplying gasoline and water to residents who approach them – Photo: AFP/Joe Raedle

It is still paradoxical, as López reaffirms: “When that country enters a recession, people look for the US dollar as a refuge, because it is the reserve currency at a global level.” Consequently, the transmission to the price is rapid and happens every time there is a possibility of a recession, and of this being delayed.

The fears in the nations are of all kinds, because if the United States continues to slow down, the exports that Latin American countries send to that market will be affected, which, consequently, will impact local income. Even more so for a country like Colombia, which has a good part of foreign trade with that country.

It goes up and then it goes back

From the perspective of Felipe Campos, an analyst at Alianza Valores, the good thing is that the recession is symmetrical. “The dollar rises a few pesos and lowers them, generally, in the following six months. He did it in the recessions of 2009 and 2001.

Felipe Campos Alliance Investigations Manager
Felipe Campos, Alliance Research Manager. – Photo: esteban vega la-rotta-week

The recession there hits the economy here

Campos recalled that in recessions in the United States, for example, those of “1981-1982 (one year and four months), 1990-1991 (eight months), 2001 (eight months) and 2007-2009 (one year and six months)Colombia reduced its growth in 1980-82 from 4.09% to 0.95%, in 1990-1991 from 4.28% to 2.0%, in 2000-2001 from 2.92% to 1.47% and in the great recession 2007-2009 from 6.90% to 1.65%.

Similarly, the expert gave as an example what happened with the dollar in two of the recessions in the United States. “In 2000 and 2009, the dollar in Colombia increased by 700 and 1,000 pesos, respectively; emerging stocks lost 35% and 66%, and the price of a barrel of oil fell 47% and 77%, respectively”.

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