Why has the cost of a dollar jumped?

The answer may well have to do with the hefty US$4.8 billion loss Portugal's largest bank (in terms of assets), Banco de Espirito Santo, reported on July 30. Losses could be even higher, up to US$5.7 billion. The US$4.8 billion loss was 72% higher than had been expected earlier in the month when Portugal's central bank -- based on information provided by KPMG, the Espirito Santos's group's auditors -- stated on July 11 that Banco de Espirito Santo had enough capital to weather possible losses.

The central bank not only ordered the bank to raise more capital, it also forced the suspension of voting rights of three Board members of the Espirito Santo family and ordered the  bank's auditors replaced. Last week, the family patriarch, Ricardo Espirito Santo, was arrested in connection with an investigation of money laundering and tax evasion. An outsider replaced him as head of the bank.

The damage had already been done, though. Extensive lending to prop up weak companies in the family empire took its toll when those family companies failed anyway. Three family holding companies have filed for bankruptcy protection this month.

What does this have to do with Mexico? Portfolio flows... If the effective failure of Portugal's largest bank were to cause investors to become more concerned about risk, they will pull back from investments in emerging markets. Economex does not think it's a coincidence that the fix rate peso jumped from $13.06 on July 29 to $13.23 on the 31st.

And then, of course, Argentina's default doesn't help.

A poor year for US growth...

The IMF has again reduced its expectations for growth in the US. Now, the Fund is projecting a 1.7% growth rate for 2014. That's bad news for Mexico, for whom exports to the US are so important to its own growth.

It's not all bad news, though: the damage was done in the first quarter, when GDP contracted 2.9%. The rest of the year should be quite decent: the IMF expects the US economy to grow 3% - 3.5% in what remains of 2014.

The IMF has reservations about US growth over the longer-term, putting the growth rate at 2%, tops, unless there are major reforms, "including tax and immigration changes, more investment in infrastructure and job training, and the provision of childcare assistance, which could help lure more Americans into the workforce" (July 23 New York Times). The Fund even went so far as to argue there is a "strong case" for more government spending to support the recovery, provided there's a plan to tackle entitlement spending later.

The need for structural reforms to boost the economy's sustainable long-term growth rate isn't confined to Mexico.

Bubbles? Not the preserve of monetary policy says the Fed...

Federal Reserve (Fed) Chairperson Yellen reiterated her view on expansive fiscal policies and asset bubbles in a speech at the International Monetary Fund on July 2. Dr. Yellen accepts that maintaining financial stability is a primary responsibility of the Fed but argued that is best done through macro-prudential regulation. Acknowledging the challenges to regulating successfully that the substantial shadow banking sector poses, she made it clear, however, that she hasn’t eliminated monetary policy as a tool to rein in financial excesses.

Not all policymakers are as sanguine that low interest rates and expansive monetary policy don’t pose a threat to financial stability. Perhaps the perception of a threat depends on whether the size of the economy relative to the size of capital flows… As RaboBank put it, although the “approach is arguably an improvement on the Greenspan/Bernanke-era “Let Them Eat Bubbles” policy stance, it still does not seem to address the issue that in today’s global, interconnected markets central banks will presumably have to be regulating left, right, and centre to try to prevent bubbles from forming somewhere”.