Policymakers and legislators in Latin America are now preparing for the next round of 'currency wars' as inflows would place pressure on their currencies. The current financial landscape would create massive inflows into Latin America and other markets in 2013.
These actions include the easing of the Euro Zone Debt Crisis, newly instituted stimulus programs in Japan and a return for high risk securities demand would cause the new round of currency wars.
Amongst the measures taken were Colombia's cut in its interest rates and ramping up of dollar purchases. Peru, for its part is paying US$1.5 billion in foreign debt in advance and there are plans to aggressively hold back currency gains. Costa Rica has placed higher taxes on foreign investments while Mexico who historically has opted for a laissez faire approach to the currency market, is now considering cuts in its interest rates.
The tools to address these are in purchasing of dollars, as what Colombia and Peru are undertaking, greater controls as what is done in Costa Rica and Peru with its increased depositary requirements for dollar denominated accounts.
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