A question many of us are asking right now is: How is the colon appreciating so rapidly vs the dollar? Since June, 2022, the USD has lost over 25% of its value against the Costa Rican Colon. No other currency worldwide has appreciated so much against the dollar, not the Sterling Pound, not the Swiss Franc, nor the Japanese Yen.
At this writing the official exchange rate is 501 colons to the dollar, the lowest it has been in a decade. Some banks have it pegged as low as 490 to the dollar.
All sectors that deal in transactions involving the dollar– tourism, import/export, etc are feeling the bite. There have been layoffs. Things are so dire that the archbishop of the Catholic church, which still wields considerable power here, has been asked by these sectors to intervene. The response of the Costa Rica government has been akin to Let Them Eat Cake. On the surface, there are possible answers. There are more dollars than ever in circulation.
The exchange rate skied during the pandemic due to a temporary dollar shortage here. Since travel restrictions were lifted tens of millions of dollars have entered into the local economy. Every new influx of dollars into the Tico market devalues the dollar a bit more.
The government is also more concerned with the inflation rate in colons than the exchange rate in dollars. And according to the latest figures, the inflation rate in 2022 was 8.2%, but dropped to an impressive 0.66% in 2023.
Theoretically, this helps the Costa Rican working class. But the cynic in me (and after over 30 years here my cynicism is well earned) says that there may be other reasons for the downturn. Are high ranking and well connected officials within the government hoarding dollars for the moment they can juice the rate in favor of the dollar?
The first weekend of March, 2014, the exchange rate went from 507, where it had been holding steady for several weeks, to 545, with no real explanation given for the sudden upswing.
One wonders if the puzzling strength of the colon versus the US dollar is just another indication that the dollar may be in the twilight of its world economic dominance. The Bric countries (Brazil, India, Russia, China, et al) now hold a larger share of the world GDP than the G7 countries.
Much of their trade is now being done using the Chinese Renminbi. They have also discussed a long range plan to create their own currency. And then there is bitcoin. While its value is expressed in dollars, it is considered its own currency by its relatively small number of adherents.
The worth of a bitcoin fluctuates like the weight of a crash dieter. Two and a half years ago it was at 64,000. One and a half years ago it was below 20,000. Now it is back up over 64,000.
Bukele in El Salvador– one of bitcoins most aggressive proponents– says 1 bitcoin equals 1 bitcoin. The value is what two parties agree upon. Imagine finding yourself stranded on an island where nicely polished pebbles were the currency. You can buy anything with this currency but once you leave the island and reach a land where pebbles are not accepted, your currency becomes worthless. This is true with any currency, of course. I am not an economist.
But does it matter in this day and age? The internet is rife with laymen challenging experts in their fields. (I have a joke I use any time I am returning to the US for a visit– ‘I am getting myself in the proper mindset for the US, by forming unshakable opinions on complex topics about which I know nothing’).
But the writing may be on the wall. When the little ol’ Costa Rican colon flexes its muscle against the dollar, it doesn’t take an expert to see that the US dollar could someday be toppled from its pedestal as the most used and trusted currency worldwide
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Don Mateo
