Monday, September 22, 2008

The Pesos of Summer

Last April, as I flew from Santiago back to California, the Chilean peso stood at roughly 430 pesos per dollar, as tourism operators, fruit exporters, wine producers and others moaned that that the strong currency was undercutting their export-oriented industries. Around that time, I noted, UCLA economist Sebastián Edwards was predicting that the overvalued peso would reach an equilibrium of about 535 to 545 per dollar, thanks in part to central bank purchases. In turns out that Edwards was almost spot on - even after the US financial bailout crisis caused a 13-peso drop from last Friday's rate, this morning's peso stood at exactly 535.

Meanwhile, last week, Argentina's central bank had to sell off dollars to keep their peso from plunging against US currency, but the exchange rate has still fallen from 3.05 to 3.13 per dollar, even as the Buenos Aires Herald notes, in an editorial today, that "it is a supreme irony that so many people are flocking to buy dollars when they are the currency of crisis." In such a volatile international economic environment, it's hard to make any predictions but, given Argentina's inflation problems, about which I wrote in an earlier post, it's a good bet that Argentine prices will continue to rise - even though President Cristina Fernández de Kirchner appears to have finally acknowledged that a weak peso fuels inflation.

For the moment, Chile seems to have gained some competitive advantage with its devaluation but, given Argentina's volatile economic history, anything could happen there. The question is whether, in the aftermath of the US financial meltdown, many travelers will feel able to take advantage of two countries that, by most standards, are still affordable destinations for the upcoming southern summer.

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