Tuesday June 26, 1:22 pm Eastern Time
Tale of Two Dollars trips Latam economies, trade
By Richard Jacobsen
MEXICO CITY, June 26 (Reuters) - Latin America is living a tale of two dollars, with exchange rates versus the U.S. currency causing different kinds of economic pain from Chihuahua to Patagonia.
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In South America, the beefed-up greenback has stomped the Brazilian real, forcing the central bank to jack up interest rates, potentially chilling growth. The Chilean peso is near record lows, while Argentina, its peso pegged to the dollar, has adopted a dual exchange rate system to help battered exporters.
Meanwhile, Mexican exporters complain about the opposite problem, a ``super peso'' that strangles their businesses, making the dollar look like a 90-pound weakling.
Market concerns Argentina's economic straits will spill over to its neighbors have exacerbated the gap between the South American currencies and Mexican peso, which is feeding off a heady diet of foreign investment cash seeking a relatively safe haven.
A change in the trend is not expected in the near future.
``We believe the Mexican peso is probably technically overvalued (versus the dollar), while the Brazil real and the Chilean peso are probably undervalued at this stage,'' said Yianos Kontopoulos, local currency strategist for Latin America, at Merrill Lynch in New York.
The dollar, currently around 15-year highs against a trade-weighted basket of currencies, has strengthened in recent years on the back of the U.S. economic boom.
Since the mid-1990s U.S. administrations have repeatedly backed a strong dollar, saying it keeps inflation in check and promotes investment.
TAKING A TOLL
But it has taken its toll in Argentina, hindering the ability of Latin America's third-largest economy to pull out of a three-year recession.
``The difficulties the strong dollar has caused for Argentina have been so intense that it's been causing the spillover into other economies by a sort-of contagion effect,'' said Neil Dougall, chief economist for Latin America at Dresdner Kleinwort Benson.
Earlier this month, Argentina unveiled a new currency system, partially floating the exchange rate for exports and imports and excluding them from the peso's one-to-one peg to the U.S. dollar.
The government argued that the measures will help lift the country out of its funk, benefiting exports by making it cheaper to sell goods abroad. Some market players, however, saw the measure as a precursor to a full devaluation, although President Fernando de la Rua has denied this.
``The fact is, the best scenario for Argentina would be a weaker dollar'' which would also weaken the peso, said Javier Finkman, HSBC Argentina chief economist.
A weaker dollar could also help Brazil and Chile.
The Brazilian real (BRBY - news) has lost about 18 percent of its dollar value so far this year, pressured by concerns about U.S. and Argentine economic weakness, along with political scandals and emergency energy rationing at home.
Last week, with the real about 27 percent weaker on the year, Brazil's Central Bank aggressively raised interest rates 150 basis points and announced it had a $10.8 billion war chest to bolster its foreign exchange reserves and support the real in a bid to head off inflation.
The Central Bank's action did not alleviate the fundamental economic problems plaguing the real, but stemmed demand among investors for a hedge against future weakness in the currency.
Chile's peso has weakened nearly 8 percent against the dollar since the start of the year, partly due to regional economic instability and partly because of a series of interest rate cuts aimed at jump starting consumer spending.
Fears that a strong dollar could lead to Chile ``importing'' inflation are subsiding due to the failure of the domestic economy to pull out of a slowdown, economists say.
BENEFITS SLOW IN COMING
``There should be a beneficial effect on trade performance in Brazil and Chile at some stage'' due to the weak currencies making exports cheaper abroad, Dougall said. ``But the problem is that sluggish world trade growth is making it more difficult to reap those gains in the short term.''
Several heavyweight Brazilian firms, notably leading Latin American steelmaker CSN (NYSE:SID - news), saw healthy operating profits decimated as their dollar-denominated debts ballooned in local terms.
Conversely, companies with firm exports like world No.4 commercial aircraft maker Embraer(NYSE:ERJ - news) or world No.1 iron ore miner CVRD, saw their profits boosted as their overseas earnings were magnified in local terms.
Banco de Mexico, the nation's central bank, eased monetary policy in May but exporters say further easing is needed to beat down the peso, which has strengthened some 6 percent against the dollar so far this year.
Exporters say the strong peso is squeezing their profits and threatening their businesses as they try to cope with a slowdown in the U.S. economy, which buys nearly 90 percent of Mexican sales abroad.
Relief for any of the Latin American currency complaints, however, is not likely soon, analysts said.
``The Mexican peso is probably going to remain strong, at least for the summer months,'' Kontopoulos said. ``The Brazilian currency will probably stabilize provided that Argentina does not surprise us and the Chilean economy is still affected by (low international) copper prices that have not allowed it to recuperate even to the extent that Brazilians have at this stage.''
(with additional reporting by Gilbert Le Gras in Argentina, Nicholas Winning in Brazil and Alister Bell in Chile)
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