The currency exchange rate between the United States dollar (USD) and the Costa Rica colón (CRC) in recent days has registered an uptick in favor of the greenback; however, some analysts believe that this is a trend that may not last too long.

High trading volumes in the MONEX, a national trading platform that provides direct access to foreign currency exchange (forex) investors, caused the USD to surge by a few CRC in a three-week period. At one point, private banks even offered to sell USD for as much as 546 CRC. As a result of this increase, some forex speculators believed that the long-awaited appreciation of the USD against the CRC was finally here, at least until the Central Bank steps in to exert monetary policy and avoid drastic forex gyrations.

The Central Bank of Costa Rica has not intervened, and the USD has already lost some of its earlier gains. There is no question that the USD has been gradually strengthening over the last couple of years as the United States leaves the Great Recession behind; nonetheless, the CRC is also strong, albeit for different reasons.

Over the last few months, the Costa Rica Petroleum Refinery (Spanish acronym: RECOPE) has been abandoning the USD as its operational currency. CRC loans are being preferred by borrowers due to clever marketing by financial institutions, and investors in Costa Rica are showing an interest in Eurobonds. These three economic trends result in the strengthening of the CRC, which explains why the Central Bank has not staged an intervention.

At this time, USD volumes in Costa Rica are more than adequate and demand for the greenback is not very strong. The forecast for the USD from now until the end of the year is favorable, but the same goes for the CRC. As long as these two currencies remain strong, any significant increase or decrease in their exchange rate will likely be due to a temporary supply and demand issue or speculation.

Source: Staff Analysis, Central Bank of Costa Rica