Colombia’s dollar price: fiscal uncertainty and U.S. elections drive up the price of the dollar

November 6, 2024

The dollar price in Colombia is at its highest level since 2024 as a result of the interaction between internal and external factors.

Rise in the price of the dollar, banknotes, U.S. dollars, Más Colombia

The dollar price is at $4.414. This increase is attributed to multiple factors, both domestic and international, which have created an environment of uncertainty and pressure on the exchange rate.

As events unfold in the U.S. election environment and fiscal concerns in Colombia worsen, the dollar is expected to remain strong. This analysis delves into the factors influencing the dollar’s price and presents forward-looking projections.

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Domestic Factors Influencing the Dollar Price

1. Fiscal uncertainty

Investors have begun to perceive an increase in the risk associated with the Colombian economy, particularly due to the government’s budgetary difficulties. The $523 billion budget, which was expected to be approved before October 21, did not make it through Congress, meaning that it must be enacted by the president.

In addition to this, the non-compliance in the execution and the low tax collection led to the freezing of part of the budget this year.

The reform to the General System of Participations (SGP) and the Financing Law have introduced new uncertainties in the fiscal outlook. Concerns about the sustainability of public debt and the effectiveness of spending increase pressure on the local currency.

In addition, the labor reform that increases production costs could weaken the competitiveness of companies and affect the country’s ability to attract foreign investment and increase tax revenues.

2. Energy policy

The accelerated transition to less dependence on fossil fuels, which are vital to the Colombian economy, increases the perception of country risk. This shift affects fiscal revenues, as oil and coal are the main sources of foreign exchange. The decline in these sources of revenue may make access to financial resources more expensive, exacerbating pressures on the price of the dollar.

3. Insecurity and internal conflicts

Security problems and the stalemate in the search for “total peace” have a negative impact on investment. The expansion of illicit crops and persistent violence generate an environment of uncertainty that increases the risk perceived by investors, which in turn translates into an increase in the price of the dollar.

4. Lack of effective policies

Ineffective implementation of reindustrialization policies and low effectiveness of monetary policy in the face of high interest rates contribute to the weakness of the Colombian peso. According to Grupo Proindustria, these deficiencies limit competitiveness and economic growth, which is reflected in the pressure on the exchange rate.

Dollar price, banknotes, U.S. dollars, Más Colombia

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International Factors Pressuring the Price of the Dollar

1. U.S. Elections

The U.S. presidential elections generate significant uncertainty about the economic and trade policies that could be implemented. The possibility of a victory for Donald Trump, who has proposed changes in tariffs and international trade, affects market expectations about the future of the dollar and its impact on Colombia.

Rising dollar price, U.S. voting, U.S. elections, Más Colombia

2. Geopolitical tensions

The increase in war, trade and political tensions at the global level also has an impact on the Colombian economy. Protectionist policies of the United States and Europe against nations such as Russia, China and Venezuela, together with the consolidation of blocks such as the BRICS, could affect international trade and global economic stability.

3. Global financial markets

The results of large technology companies and other sectors that represent more than 40% of the capitalization of the S&P 500 also have a direct impact on the price of the dollar. The price of the dollar is expected to be influenced by movements in these markets, where uncertainty about economic growth may generate capital flows into the dollar as a safe haven currency.

Future Outlook

Projections for the price of the dollar in Colombia indicate that, once the U.S. election results are defined and a new interest rate is announced by the Federal Reserve (Fed), the dollar is likely to start a deceleration process. If the Fed decides to cut rates by 25 basis points, this could stabilize markets and provide relief to exchange rate pressure.

However, it is complex. Domestic fiscal challenges, reforms and the Colombian government’s ability to implement policies that encourage investment and fiscal sustainability are determinants for the evolution of the exchange rate.

International uncertainty, driven by multipolarity and the rise of new economic blocs, could further influence the dollar exchange rate in the country.