The dollar index hit a one-month high after Federal Reserve officials spoke of the need for further rate hikes and investors reassessed the US central bank’s July meeting minutes.
The dollar index (DXY), which measures the dollar against a basket of currencies, has registered an increase of 12.4% in the year and stands at 107.49 points, its highest level since last July 15. However, despite the strong momentum of the dollar, Latin American currencies have stood out since the beginning of the year due to the increase in the price of raw materials such as oil and grains.
What are the strongest currencies in 2022?
The Mexican peso is the fourteenth most appreciated currency in the world and the fourth among emerging countries. Other strong currencies in the world include the Russian ruble, with 25.28%; the Armenian dram, with 18.64%; Afghani from Afghanistan with 17.51%; Georgian lari with 13.29% and the Uruguayan peso, with 10.27%.
On the other hand, the emerging currencies with the strongest strength in 2022 were the Russian ruble, with 25.28%; the Brazilian real, with 7.79%; the Peruvian sol, with 4.1% and the Mexican peso with 1.9%.
“Market sentiment has been dictated by monetary policy, primarily from the Federal Reserve. This expectation (of a rate hike) dimmed after the release of the July inflation report, which was lower than expected. However, after this report several Fed officials mention that there is more evidence that inflation has already reached a ceiling and they will begin to evaluate ending this upward cycle,” said Janneth Quiroz, deputy director of economic analysis at Monex.
On Thursday, most Latin American markets fell on increased risk aversion, stemming from expectations that the Fed will keep accelerating on interest rates fueling the prospects of an economic recession. This situation increased the demand for dollars, a currency considered a refuge, causing the exchange rate to overreact, explained Sergio Olarte, chief economist for Colombia at Scotiabank.
In Latin America, currencies have benefited from anticipated rate hikes, which favors investments denominated in those currencies in the short term.
James Salazar, deputy director of economic analysis at CI Banco, said that other currencies that offer a certain behavior similar to the Latin American ones are the currencies of Indonesia and South Africa. However, he pointed out that the region’s currencies still have relative strength as seen in recent months.
On the other hand, the currencies of developed countries have had a general weakening due to the war in Ukraine and therefore to the problems of the energy sector in Europe, for which the Japanese yen, the Swedish krona, the pound sterling, the Danish krone and the euro show depreciations so far this year of 15.31, 13.72, 11.78, 11.23 and 11.21%, respectively.
Is it convenient to buy Latin American coins?
The CI Banco analyst stressed that despite the good appreciation of Latin American currencies, in the last quarter of the year the operators will turn again to the dollar and to the currencies that have performed well so far this year.
“In the very short term, we could still be involved in these currencies from Latin America and some from Asia, but in the last quarter we could have a more focused focus on the dollar due to the estimated increases from the Fed and due to the expected levels of inflation, since that in real terms, the rate will not be so negative and that makes Treasury bonds more attractive”, concluded Salazar.
Although specialists say it would be a bit speculative, the behavior of Latin American strong currencies will depend on important events in the coming months, such as in Brazil, since the presidential vote is expected in October, which points to the left-wing candidate as preferred.
“Investors don’t like uncertainty. In the Brazilian real, they will bet on the status quo, that the current president remains in office, which would not generate much noise. We see some important local risks that have to do with the voting that will take place in October, where today they indicate an advantage for Lula da Silva and that could be subtracting some gains, “said Quiroz.
With information from Reuters