Costa Rica Currency Outperforms as Oil Cuts Dollar Demand

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Costa Rica’s currency is the Western Hemisphere’s strongest performer this year as lower oil prices cuts demand for dollars to import crude.

Costa Rica’s colon has gained 1 percent this year, the most among 17 Latin American and Caribbean currencies tracked by Bloomberg, compared with a 2 percent drop for Guatemala’s quetzal, the hemisphere’s top performer in 2014. The colon was unchanged on Thursday at 534.3 per dollar.

A drop in oil prices that started in June last year has cut the state-owned oil refinery’s demand for dollars by $900 million annually, according to Jose Luis Arce, program director at Consejeros Economicos y Financieros SA in San Jose.

“Lower oil prices in the international market will reduce the oil bill between 30 to 40 percent,” Arce said via e-mail. “This is the main source of demand for foreign currency in the local exchange market.”

The currency gains cost Costa Rica’s private banks, which hold most of their capital in dollars, 6 billion colons in the first quarter, local trading firm Aldesa said in a statement.

Costa Rica’s central bank announced in January it would allow the currency to float against the dollar after decades of gradually reduced brakes on its volatility. It also announced a program to buy as much as $800 million through 2016.

In a statement last week, the central bank said “the colon continues to strengthen” as financiers repatriate money held overseas, contributing to an influx of dollars in the $50 billion economy.

Costa Rica sold $1 billion in 30-year global bonds in March, a move which will contribute to further gains, according to Hernan Varela, chief strategist at Aldesa.

“Our expectation is that during this year the colon presents strong pressures toward appreciation due to the lower demand for dollars,” Varela said.

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