Dollar in Colombia closed the week below $4,500 COP and could drop further: this is how it would impact the economy

After a month with a downward trend, the dollar in Colombia continued its downward path to the point that the market’s representative rate today, Friday, April 14, closed at $4,425.27 registering a slight increase after it opened 34.85 pesos lower compared to yesterday’s TRM of $4,458.87.
| You may be interested in: Withholding tax 2023: What is it and how is it calculated?
The fall, which has been registered since March 17, 2023 when the TRM was $4,866.50, has been 441.23 Colombian pesos, so experts are talking about a weakening of the US currency, however, the Colombian peso is still far from reaching the levels of a year ago when for each dollar there was $3,737.
We consulted Daniel Gómez, professor of Economics at Universidad de la Sabana, about the possible inflationary outlook for the country, as the national currency recovers against the U.S. dollar.
For Daniel Gómez, the strengthening of the Colombian peso seen in recent weeks may be related to the increase in interest rates by the United States Federal Reserve (Fed) and the uncertainty generated by the banking crisis in that country.
On March 22, the Fed announced a 0.25 point increase in its interest rates, from 4.5% to 4.75% per annum. This increase was made in a period in which the Fed, or U.S. central bank, has been steadily increasing interest rates in recent months, and after they were close to zero percent.
Along with the increase to 4.75%, the U.S. central bank also warned that it would not be the last one, and analysts have already estimated that interest rates could reach 5.1%. However, the latest increases have already been the highest since September 2007.
According to Jerome Powel, Chairman of the Fed, the measure seeks to lower inflation in order to achieve the 2% target, “price stability is the Federal Reserve’s responsibility. Without price stability the economy does not work for anyone and without price stability we will not achieve a sustained period of strong labor market conditions for everyone”, Powel said on March 22.
| You may also be interested in: Colombia is producing more pet products and export opportunities are growing
How does the drop in dollar prices affect Colombia?
According to the university professor, the devaluation of the Colombian peso has had a very strong impact on inflation in Colombia in recent years. This explanation also goes through the large amount of food that the country imports, in addition to agricultural inputs, which have a direct impact on the price of food.
A few weeks ago, the Minister of Agriculture, Cecilia Lopez, stated that in 2022 Colombia imported about 15% of the food consumed in the country, corresponding to 15.9 million tons of imported food. This import volume explains 65% of inflation, said the head of the ministerial portfolio.
In line with the above, Professor Gómez emphasizes that “it is possible that the high inflation recorded in the last year is related to the devaluation of the peso and the increase in the price of imports”. For this reason, “the current appreciation [or strengthening] of the Colombian peso may translate into a reduction of inflationary pressure in the country, as a consequence of cheaper imports”, said the academic.
The fact is that as the Colombian peso gains strength against currencies such as the U.S. peso, Colombia’s purchasing power in the world increases. However, this scenario is still far from being a reality.
Gómez estimates that it is very unlikely that the dollar will fall below $4,000. Whether the downward trend will continue will depend largely on changes in Fed rates, as the strengthening of the peso we are currently seeing is more linked to the U.S. situation than to the economic policies being implemented by the national government, he concluded.
| Continue reading: Is the de-dollarization of the world economy on its way? Several facts suggest so