Currency concerns start to resurface

The strength of local currencies is once again starting to trouble policymakers across Latin America. But while there has been a tendency to blame exchange rate appreciation on a third round of quantitative easing by the US Fed, strong currencies are largely the result of high commodity prices and, in many cases, excessively loose fiscal policy. Either way, the result is that domestic industry has continued to struggle in recent months even though economic growth in general, and consumer spending in particular, has held up reasonably well. As it happens, we suspect that a fall in commodity prices will cause local currencies to weaken next year. But in the meantime it seems that policymakers will remain focussed on preventing further currency appreciation, mainly through intervention on the foreign exchange markets. One important exception to this is Mexico, where the drivers of economic growth are better balanced, and the currency is less obviously overvalued.