The euro, much like the US dollar, has experienced a recent decrease in value in Colombia, driven by a combination of factors. This article delves into the specifics of this currency movement, providing an analysis of the situation as of June 6, 2023, and exploring the underlying reasons for these fluctuations.
On June 6th, the euro closed with an average price of $4,514 Colombian pesos (COP), marking a decrease from the previous day’s close of $4,602 COP. Throughout that Tuesday, the euro reached a high of $4,592 COP and a low of $4,483 COP. This downward trend has been evident since April 28th, when the euro was trading at approximately $5,181 COP.
According to Diego Gómez, an expert in external context and exchange markets at Investigaciones Corficolombiana, the euro to Colombian peso exchange rate mirrors the dynamics observed with the US dollar to Colombian peso. He suggests that the euro’s depreciation against the Colombian peso is partly due to perceptions of reduced governability within Colombia. This sentiment implies that if such perceptions solidify, the likelihood of radical reforms being implemented diminishes, positively impacting local asset performance. This occurs even as the euro has strengthened globally due to receding impacts of the conflict in Ukraine and the resilience of economic activity despite interest rate hikes by the European Central Bank (ECB).
José Joaquín Prieto, Sales Business Head at BTG Pactual Colombia, further explains that the euro’s decline against the Colombian peso is significantly influenced by the US dollar to Colombian peso exchange rate. He points out that the euro’s exchange rate dynamics are indirectly tied to the dollar because transactions often involve converting euros to dollars before reaching Colombian pesos. Prieto highlights a broader trend across Latin America where currencies are becoming more attractive due to higher interest rates compared to developed nations.
This attractiveness of Latin American currencies, including the Colombian peso, is sustained by interest rates that remain higher than those in many G7 countries. Prieto suggests that as long as Colombian currency maintains this relative strength, it will overshadow fluctuations against major global currencies. Consequently, while the dollar may strengthen against other currencies globally, its effect on the euro-peso exchange rate in Colombia is mediated by this regional currency strength. He anticipates this trend to continue as interest rate policies persist.
Euro vs. US Dollar Performance
Prieto also analyzed the euro against the US dollar (EUR/USD), noting that its movement is closely linked to expectations surrounding central bank actions and interest rate adjustments. He explained that the US Federal Reserve (FED) had been aggressively raising interest rates to combat rising inflation. However, with inflation showing signs of stabilization, there is now an 80% probability that the FED will hold rates steady at its June meeting, with only a 20% chance of a further 25 basis point increase.
In contrast, Europe has witnessed a more significant easing of inflationary pressures. Consequently, the ECB’s interest rate hikes are not expected to continue at the previous pace. This shift implies that the anticipated narrowing of the interest rate gap between the US and Europe may not materialize as initially expected. This has contributed to the euro, after reaching highs of US$1.10 to US$1.11, retracing some of its gains and currently trading around US$1.078. Ultimately, the dynamics between the euro and the dollar, and subsequently the euro and the Colombian peso, are heavily influenced by the interest rate policies of central banks and their impact on currency valuations.
In conclusion, the recent decrease in the euro price in Colombia is a multifaceted issue influenced by both local and global economic factors. Perceptions of domestic policy, the attractiveness of the Colombian peso due to high interest rates, and the interplay between the euro and the US dollar in response to central bank policies all contribute to the current exchange rate dynamics.
