The Dollar’s Rise and What it Could Mean for Chile

By Sergio Arancibia (El Mostrador)

HAVANA TIMES – During the first days of July, the price of the US dollar has risen quite substantially in Chile’s internal currency exchange. Given this situation, it’s a good time to inquire into the causes and the consequences, and to analyze the mechanisms, instruments and goals of the economic policies that may be forthcoming to deal with the situation.

In terms of causes, the first element to consider is undoubtedly the problem of increased world inflation as a consequence of the war between Russia and Ukraine. That world inflation in the price of food, fertilizers and fuel, to note some basic goods, necessarily translates into internal inflation in Chile and other developing countries.

If all the goods and services suffer price hikes in the internal market, the dollar must also increase in price. In that sense, we can think of it as a commodity, like any other. If the price of a dollar were to stay static in an inflationary context, it would become a relatively cheaper item, and for that reason its demand would increase.

The other element that must be considered amid the causes, is the increase in interest rates in the international financial markets, as a consequence of economic policies adopted in the large, developed countries. That rise in rates tends to make those countries more attractive to the capital that flows through the world seeking opportunities for profitable investments. These capital resources then abandon the developing countries, generating additional demand – or a smaller supply of dollars – in the latter countries. This process, too, has caused the price of the dollar to rise in Chile’s foreign exchange markets and those of other developing countries.

Even if the war between Russia and Ukraine had never taken place, and the international markets weren’t faced with a smaller supply of food commodities, the rise in interest rates in the US and Europe would still have had an inflationary effect on the price of the dollar in the developing countries. If we combine both phenomena, the inflationary impact is yet more.

In addition, in Chile, the drop in the price of copper normally has the immediate impact of raising the price of the dollar. In reality, the drop in price of the metal in itself doesn’t produce the immediate consequence of a lesser availability of dollars in the country. That impact will manifest itself in the coming months. However, the effect is immediate, due to speculation – or at least subjective perceptions – since those who assume that there’ll be a reduced offer of dollars in the near future hurry to buy them, in order to profit from the eventual rise in price.

That increase in the price of the dollar could be reverted, reduced or at least stabilized through economic policy measures that are currently the responsibility of the Central Bank. The Bank could opt to leave the price of the dollar at high levels, because the series of effects that will be produced aren’t necessarily bad. If they allow the price of a dollar to rise, imports will become more expensive and probably less abundant; many internally produced products will thus be favored, meaning some degree of import substitution and thus industrial growth. Also, there’ll be less incentive for capital flight than when the dollar is cheaper. In addition, those who have debts in dollars will see that debt lightened, when expressed in Chilean pesos. At the same time, exports will be benefited. However, the cost of such a policy would doubtless be a higher rate of inflation.

The other possibility is to make a play to lower the price of the dollar, by launching dollars onto the market, thus reducing Chile’s international reserves or increasing its external debt. Such a step would encourage imports and discourage production for the internal market, damage exporters and favor those who take capital out of the country, since that process makes it cheaper. Inflation, though, would be lessened, partly because the price of imports wouldn’t increase, and partly because the sale of dollars would restrict the money in circulation.

To sum up, not everything about a rising dollar is bad and not everything about a lower-priced dollar is good. It all depends on the model in mind for the country and for its economic development. In any case, the corresponding policies must be coordinated by the Executive branch, since the economic and social effects that take place must be ordered, complemented or in some cases compensated, through measures that are out of the hands of the Central Bank. Given that global policies of industrialization or development are in play, these measures should be made known clearly and transparently to all those concerned.

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