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U.S. dollar devalues in Costa Rica as year-end payments kick in and oil prices decline

November 28, 2008

Year-end expenses incurred by businesses and the fall in the price of raw materials, including oil caused the U.S. dollar´s value against the colon to drop to its lowest value in over four months.

According to analysts, the drop reflects the abundance of dollars in the market, a product of the currencies exchanged by foreign firms this time of year to pay the aguilado – a mandatory, untaxed year-end bonus equal to one month´s wages – and other taxes in colones.

Friday, the US dollar selling rate closed at 536.75 colones, a significant drop from the 550.75 colones to the dollar registered at the markets´ opening that day.

Other elements that explain the dollar´s devaluation in Costa Rica, says economist Alberto Franco, are reduced growth in exports, the reduction of taxes from tourism and the contraction of direct foreign investment.

Moreover, the Central Bank has not sold dollars on the wholesale market (Mercado mayorista) during the last two weeks as it did from July through mid November in an effort to defend the upper limit of the bands, or the rates within which the dollar can be traded against the colon.

Last Monday, the U.S. dollar was selling for 560.69 colones, but then continued to drop through the week until it closed at 536.75 by this weekend, a 4.27 percent devaluation and the lowest selling rate since July 15.

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