Read on Twitter
The J$/US$ rate is NOT RUNNING AWAY. The last closing rate quoted was around 147; some said ‘another record…sigh 
https://abs.twimg.com/emoji/v2/... draggable="false" alt="😩" title="Weary face" aria-label="Emoji: Weary face">’. But, why are some Jamaicans terrified of a depreciating dollar, knowing that the rate has been largely bouncing around a range of about 125-140 for a long time?
This fear stems from a belief that depreciation will feed into higher prices. Well, it might, but for a long time now the pass-through of exchange rate movement to domestic prices has been muted. It could change, but it’s not inevitable.
But, economic agents in Jamaica may not be able to pass on exchange rate changes, not least because it’s been well-established by research studies that this is harder to do in a recession.
But, why is the J$ falling now? First, during the #COVID19 pandemic, many people rush to ‘safe haven’ financial assets. The US$ has long been that safe haven & again US$ has been the clear winner in the safe haven stakes.
So, if the US$ is what most of the world wants in this time of crisis, the other currencies must look weaker when traded against it. The J$ rate is, therefore, not acting differently to most other currencies vs the US$.
But the best measure of the general US$ strength is its index, which hit a high of 102.99 in late—March, as the pandemic news spread and global fears increased; it closed yesterday at 99.6, as shown in the chart.
Chris Miller (Foreign Policy Research Institute) recently assessed ‘The dominance of the US dollar during the COVID-19 pandemic’ and wrote:‘the demand for dollars was not surprising: whenever the world economy seems riskier, investors gravitate toward greenbacks.‘
So, the J$ must trade worse against the US$ because people prefer the latter in a crisis. Plus, even in a slower economy, people also have operational needs for FX. That’s the demand part. Jamaicans are just like most of the rest of the world
Second, inflow of FX suffered badly; the main sources were tourism revenues & remittances. IMF estimates put projected tourism earnings at just <US$1 billion (from over $3 billion previously expected; down 68%) & remittances at about $2 billion (from $2.3 billion, down 17%).
IMF financing of US$520 million approved last week will bridge some of the lost FX, but clearly a large FX funding gap remains. With the world in search of US$ & Jamaica’s specific supply problems the local FX market must be in a more-stressed position; the rate must depreciate.
The Bank of Jamaica wrote a nice primer on floating exchange rates, yesterday, on Twitter, pointing out that a temporary shortage of FX is not a real shortage of FX for the country: https://twitter.com/CentralBankJA/status/1194375625978601472">https://twitter.com/CentralBa...
They could have stressed Jamaica& #39;s net international reserves are still at healthy levels (US$3 billion in April) & are adequate in terms of weeks of imports they can cover. Though this does not imply those reserves should be spent to support the exchange rate.
Many Jamaicans struggle to connect dots. Most understand severe shortage leads to sharp price increases; even if some is due to profiteering, they know it occurs. Yet, they seem startled when the same happens in the foreign exchange market, with US$ being (temporarily) scarcer.
