November 16, 2010

Guest Blog: The Falling Dollar and Lempira

The following is a guest blog from a reader who has asked not to use his name.

The Falling Dollar and Lempira

The American dollar is losing value against a basket of world currencies, about 10% so far this year. The reasons are many and complex. The world economic crisis, large US trade deficits and foremost the QE (Quantitative Easing) or in other words the massive infusion of additional new money in the financial system. The money printing presses are working overtime.

This QE was supposed to stimulate the economy and reduce unemployment. It has mostly failed but prevented the total collapse of the banking system. The Lempira for a few years already and at the present is fixed by manipulation of the Central Bank of Honduras at about L. 19.02 to U.S. $1.00. Whatever happens to the U.S. dollar affects the Lempira. Since when the value of the U.S. dollar goes down so does the Lempira, this is good for Honduran exporters, but it will result in more inflation, since many items for daily consumption will have to be paid in dollars.

Many countries like Brazil are concerned that their currencies appreciate too fast against the dollar and they will have problems exporting. There is also a massive outflow of U.S. dollars to emerging countries, where interest rates are much higher than in the U.S., and at the same time their currencies rise in value against the U.S.dollar. Interest rates for term deposit in Lempiras are 8 to 10% compared to 1 to 3% for U.S.dollar deposits in North America.

If the Central Bank of Honduras does not appreciate the value of the Lempira, then the country will be affected by greater inflation with all of its disadvantages and problems. What can Honduras do? About the only way to keep up the living standard is have a more efficient economy and trying to reduce the import of oil and a lot of food items and became more self sufficient in energy.

The great amount money (remesas) which Hondurans living in United States are sending to Honduras to support their relatives in their daily living. As inflation increases, this money will reduce their buying power.

If the price of a basket of food (canasta basica) goes through the roof, there will be riots in the streets and a big cry to raise the minimum wages much higher. This will result in more inflation and unemployment and so there will be a vicious circle of higher inflation and higher wages and on and on it goes.
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