Latam currencies take weaker U.S. dollar in stride

Tue May 20, 2003 05:23 PM ET By Todd Benson

SAO PAULO, Brazil, May 20 (<a href=reuters.com>Reuters) - Concerns that the United States may be backing off its "strong dollar" policy might cause headaches from Tokyo to Brussels, but the impact on Latin America's volatile currencies is likely to be less painful, analysts said on Tuesday.

With the exception of Ecuador, which scrapped the sucre for the U.S. dollar in 2000, the region's leading currencies tend to take their cues more from local politics and capital flows than the greenback's price against the euro or Japanese yen.

So when U.S. Treasury Secretary John Snow suggested over the weekend that he was comfortable with the dollar's recent decline -- comments the White House distanced itself from on Tuesday -- the reaction in Latin America was muted at best.

"Currency traders here spend most of their time looking at domestic factors, so the whole debate about the strong dollar policy isn't likely to have much of an impact for now," said Sergio Machado, Treasury Director at Banco Fator in Sao Paulo.

"In the long run, though, a healthy American economy is good for the region as a whole, so if letting the dollar weaken fuels U.S. economic growth, it could become a factor here."

In Brazil, Latin America's biggest economy by far, the real BRBY has lost ground against the dollar this week, but traders say the pullback is more the result of profit-taking than mounting jitters in global currency markets.

Despite having weakened slightly in recent days, the real has firmed a lofty 17 percent against the dollar so far this year, bolstered by the new left-leaning government's commitment to tight fiscal policy and long-sought economic reforms.

"If anything, the dollar's continued slide (against the euro and yen) may cause the real to either keep appreciating or at least consolidate its gains," said Christian Stracke, head of emerging markets strategy at research firm CreditSights.

CHILE LOOKS TO BRAZIL

Other regional currencies often look more to Brazil than to Wall Street for direction. Like the real, the Chilean peso CLP= has backtracked in recent days as investors locked in gains after a two-month rally.

But with the Chilean economy on the upswing, economists say the peso is likely to pay scant attention to the strong dollar debate unfolding in the United States.

Even in Mexico, which sends 80 percent of its exports to the United States, few market watchers seem to be shivering at the prospect of the U.S. abandoning its strong dollar policy.

"Frankly, we don't think the United States can afford to have a weak dollar because it needs foreign financing to cover its current account deficit," said Ramon Hernandez, deputy director of economic analysis at Ixe brokerage in Mexico City.

The falling dollar is sure to be felt even less in Venezuela, where the left-wing government of President Hugo Chavez is currently holding the bolivar VEBFIX= at a fixed official rate of 1,600 to the greenback.

Further south in Argentina, where the peso ARSB= has rallied more than 16 percent in the year-to-date, investors are more concerned about the future economic policy of President-elect Nestor Kirchner, who has yet to show all his cards to the market.

"I don't think we're going to see much volatility in the currency market," noted Marcelo Barreiro, a trader at Puente Hermanos brokerage in Buenos Aires.