The presence of Latin American currencies in the foreign exchange market is rather weak, due to various factors, such as the stability of the economy, devaluations and inflation in the countries of the region. But can anything be done about it? Can they increase their participation in the foreign exchange market, becoming competitive?
Global foreign exchange market
As is known, unlike stock exchanges, the foreign exchange market is not regulated, there are no intermediary entities. Each transaction is an agreement between the parties, although there may be agents who intervene, on behalf of said parties.
Now well, the volume of transactions depends on the clients’ need for foreign exchange, to carry out commercial transactions or, simply, of what is bought and sold, to invest and earn.
In the same order of ideas, although the world currency market does not have a center, there are nerve points. New York, London, Tokyo, Frankfurt, and Zurich are among the cities where the largest volume of operations is concentrated.
Overview of Latin American currencies
Cities in Latin America are not mentioned in the above list; as well as their currencies are not counted among the most traded pairs, a category where the euro, the dollar, the yen, the pound, the Swiss franc dominate.
This still seems like a paradoxical situation. But why does it happen? Let’s look at some factors that may contribute.
Strength of the currency
Among the first reasons why a currency is more traded or used is its strength. In this sense, Latin American economies have a serious handicap, due to the constant devaluations.
To mention a few examples, in 2022 the Argentine peso lost 41.4%.; the Mexican peso, on the other hand, lost 20% between the end of 2022 and the beginning of 2023. And we are talking about two of the largest economies in the region.
Secondly, there is the general confidence in the country’s economy. Usually, those who are going to invest prefer a solid currency, which protects their money, and not the opposite. But Latin American economies sometimes do not inspire too much confidence to the investors.
Contributing to this are the ever-present inflation, the unstable political situation, decisions that do not favor investment, and measures such as exchange controls or limits on daily amounts.
How can Latin America compete?
The most obvious answer to this question would be we must have a strong currency. But this in turn generates other questions, regarding the way or ways to achieve it. Let’s see.
A single currency
Recently the possibility of creating a single currency for the region has been put back on the discussion table. Although the idea is not new, apparently now it is not just a proposal, but a first step has already been taken.
Indeed, before the VII CELAC Summit, held in Santiago de Chile in January 2023, the presidents of Brazil and Argentina, Luiz Inácio Lula da Silva and Alberto Fernández, made the official announcement to start working for a unitary currency, to initially facilitate bilateral trade.
The proposal is expected to transcend the scope of these two nations, in the sense that other countries are expected to join the initiative of the Community of Latin American and Caribbean States. However, this path is not short, nor will it be free of obstacles, because many things are needed to achieve it.
In some research the feasibility of a possible monetary union in the region has been questioned, as it is considered that the countries of the region do not have the capacity to maintain or stabilize their balances of payments and be solvent in relation to their debts; besides that their economic models differ from each other.
The other option: dollarization
Another alternative that is proposed to have a strong currency in the region is not to create it but to adopt one. In this case, it is the dollar, a currency that maintains a fairly close relationship with the economies of Latin America, to the point that it has been used, officially or unofficially in some countries, such as: