The Direction of the Dollar: Influential Factors and Projections for 2024

2024-01-28 00:20:00

The direction of the dollar in the coming months will depend on international rather than domestic factors, with the US Fed’s monetary policy stance being key, according to Credicorp Capital.

After reaching levels close to S/ 3.90 in October 2023, amid fiscal and monetary concerns in the US that led to a strong appreciation of the global dollar, the currency shows a downward trend in the last three months, and today it is trading at S/ 3,795, says the investment bank. Although last week it rose from S/ 3,743.

The generalized depreciation of the US currency is explained by the reduction in the risk premium, so the exchange rate would be responding to external causes to a greater extent, says Credicorp Capital.

The risk premium incorporated into domestic assets decreased due to greater social and political stability (although it is recognized as fragile), and macroeconomic fundamentals that remain solid (sustainable current account, high international reserves and low public debt), he adds.

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How will the interest rate differential influence the price of the dollar?

Thus, he considers that the rate differential between the Central Reserve Bank of Peru (BCRP) and the Fed will play an important role. Today this gap is one percentage point since these rates are at 6.5% and 5.5% respectively, and might be shortened, which in turn would strengthen the dollar, indicates the investment firm.

However, he maintains that, in the event of additional upward pressures on the dollar, the BCRP will maintain active intervention to moderate them. “To the extent that the BCRP continues to lower rates, we hope that it maintains intervention to avoid strong pressures of depreciation of the sol and thus, unwanted effects on the CPI (inflation),” he adds.

He also emphasizes that the country’s solid external accounts must continue to provide support to the sun once morest the dollar.

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Favorable external accounts

In this sense, it mentions that in the third quarter of 2023 the current account registered a surplus of 0.1% of the Gross Domestic Product (GDP). In annualized terms, the current account deficit represented 0.7% of GDP. The external accounts responded to a larger trade surplus of US$3.4 billion (US$1.6 billion a year earlier) and a smaller services deficit. In turn, this was explained by a better price effect related to lower import and freight prices, as well as lower imports of goods due to weak domestic demand.

Trade balance of Peru

And, despite the expectation of a slowdown in the US and China this year, there is a broad consensus on the probability that copper will have a better relative performance in the coming years amid the global energy transition, highlights Credicorp. Capital.

With this, it is likely that Peru’s terms of trade will continue at healthy levels, he adds.

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What is Credicorp Capital’s projection for the dollar in 2024?

In this context, Credicorp Capital estimates a range for the dollar between S/ 3.70 and S/ 3.80 in 2024. Upward pressures due to the rate differential would be limited by the intervention of the BCR, solid external accounts and a favorable copper price, he emphasizes.

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