Rising demand for US dollars and lower levels of investment inflow to the oil sector have brought the Colombian peso to its weakest level in four months.
On Monday the value of the US dollar rose sharply on investor reaction to statements from the US Federal Reserve. Falling unemployment and rising housing prices have increased speculation that the US Federal Reserve may soon raise interest rates, making US investments more profitable and thus increasing the demand and value of the dollar.
This dollar appreciation lowered the value of the Colombian peso to 1,933.50 per dollar, down 4.3% from last month.
The Colombian peso had been appreciating for the majority of 2014 due to large inflows of foreign investments towards its oil sector. This increase in demand for pesos drove up its price on the international market, making Colombian exports more expensive (and thus less competitive) than those with lower valued currencies.
MORE: Surging Peso hurts Colombia’s farmer exports: Wall Street Journal
The Colombian Central Bank responded by buying almost $2 billion USD between July and September in an effort to put selling pressure on the value of the peso and consequently drive down its value.
But all of the foreign investment – namely that going towards the oil sector – that was propping up the peso has been recently drying up: oil sector investment in the first quarter of this year was at its lowest level since 2010.
Attacks on the industry’s pipeline infrastructure and lack of productive and promising exploration campaigns have made oil sector investors more cautious. The effect has been a reduced international demand for Colombian pesos, pushing down their value.
Impact on trade
The pace of Colombia’s exports has been falling as investment in the oil sector, which makes up more than half of the country’s exports, drops off. This has contributed to a trade deficit as oil exports stagnate, a development that should further depreciate the currency.
MORE: Imports of gasoline, lubricants, other oil products lift Colombia’s 2014 trade deficit
Sources
- Central banker says Colombian peso is weakening on fundamentals (Bloomberg)
- Colombia Peso Weakest Since April as Dollar Gains Broadly (Wall Street Journal)
- Profesionales de cambio venden la divisa de EE.UU. a un precio de $1.937 (La Republica)
