The US Federal Reserve is increasing the supply of money (quantitative easing) which is causing a global devaluation of the US dollar. During this devaluation China continues its policy of keeping its currency, the Renminbi, pegged to the US dollar. As the dollar weakens, so does the Yuan. (China's currency is the Renminbi. The Yuan is a unit of the Renminbi.) As the US dollar loses value, investment capital is seeking higher yields in countries with growing economies, and into commodities as a hedge against inflation.
With the Renminbi and some other currencies pegged to the dollar, and the euro coming into concern, investment capital is flooding into the emerging countries of Latin America where there are several growing economies accompanied by healthy economic indicators. For example, the average public debt in the region is estimated at 32% of GDP, compared to the US total public debt currently at 94% of GDP. (Uruguay’s public debt is 59% of GDP.)
South American countries like Brazil, Uruguay, and Chile, which have strong economic growth, and are also strong commodity producers, are being flooded with investment dollars - to the point of putting upward pressure on the value of their currencies and the commodities they produce.
With a more valuable currency, it is difficult for producers and exporters to compete with US goods, as well as goods produced by China and other countries, which are devaluing their currencies in the "currency wars".
Brazil's currency, the real, has gone up 36% in comparison to the US dollar in less than two years. In response, Brazil placed a 4% tax on foreign investment and just raised it to 6% to try to slow the inflow dollar liquidity.
Chile’s Exporter’s Association estimates that trying to stay competitive with the falling US dollar is costing the Chilean economy 22% (over 600 million dollars). Food producers and exporters are pressing the Chilean government to depreciate the peso to be more competitive with the US dollar or provide a government backed exchange-rate insurance policy to help improve confidence on the world market.
Uruguay’s economy is highly dollarized, with approximately three-quarters of Uruguayan bank deposits in US dollars. However, as the Uruguayan peso became less competitive, the government took steps to loosely peg the peso to the US dollar.
This article first appeared on Pradise Uruguay and has been reposted with their permission.
For more articles and information on Living in Uruguay visit our resource page on Escape Artist
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