The alarming rise of the peso

The increase in the value of the peso has been a popular topic among economic and business commentators in the past few weeks, and the volume of discussion about it has left the impression that something remarkable is happening, and that we should either be excited or worried about it. Allow me to offer a relatively simple explanation of why it should be the latter.

First, a bit of historical perspective about how “remarkable” the current rise in the peso really is: In the three years beginning in January 2010, the peso has appreciated about 12.2 percent. In a two-and-half-year span between September 2005 and February 2008, the peso appreciated about 38.7 percent, from just over 56 to the dollar to a high of 40.44, a peak the currency has yet to reach in its current climb. In the last half of 1997, the peso declined by about 38 percent, thanks to the Asian Financial Crisis. The effects of a rising or falling peso tend to balance each other across the whole economy; at the moment, importers are benefitting from it, as is the government, which still holds a considerable amount of debt payable in foreign currencies that is getting cheaper as the peso increases in value. As the amount and rate of the peso’s change is still rather moderate compared to recent history, the effects whether good or bad are probably not as great as we may be led to believe.