Exchange Market

Exchange Market

The Exchange market refers to the exchange system which is influenced by the supply and demand of currency (dollar, euro, yen, etc.); these fulfill extremely important functions within the economy of a country; i) they supply credit for foreign business; ii) they bring about the transfer of acquisition powers; and iii) they protect against exchange rate changes. In this market, the type of exchange is the point of balance between supply and demand of currencies. 

Since 1947 in the Dominican Republic, the type of currency was on a par with the dollar, that is to say, the official exchange rate was RD$1 for US$1. This equality remained until 1983, when a flexible currency exchange system was established allowing the free conversion of the peso into other foreign currencies.

From that moment, the relationship between the peso and the dollar stabilized to a point of equilibrium taking into account the need to buffer shocks between supply and demand in the economy. Since 1983 the peso started to adjust to the variations in the market and was devalued until in 1995 it reached RD$12.87 for US$1 (See GRAPHIC 1). Then after a decade of relative stability, in August 2002, the exchange rate went from RD$18 to RD$35 for one dollar until it reached, in 2004, around RD$42 for 1 dollar.

In agreement with economic authorities this sharp devaluation in the Dominican currency was due to rumors and news about a local commercial bank, BANINTER, and its previous fraudulent bankruptcy that provoked the intervention of the Central Bank of the Dominican Republic (BCRD), in April 2003.

This intervention and the financial crisis that followed caused a lack of confidence from economic agents, then, the announcement of the possibility of an agreement with the International Monetary Fund (IMF) which transformed a lack of trust into panic, stemming from the official exchange rate by the BCRD, rounding up to RD$42 per dollar in mid 2004 (See GRAPH 2). At the end of the same year, and thanks to the confidence awarded to the new authorities by economic agents, coming to the power on the 16th of August, headed by President Dr. Leonel Fernández, the type of exchange went through a period of downwards adjustment that is to say, an appreciation of the Dominican peso in respect of the American dollar, managing around RD$33 per dollar in June 2006.

Related Links:

• Central Bank of the Dominican Republic (BCRD)
  
• Financial Crisis of the Dominican Republic