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We would believe that the fluctuation of the dollar exchange rate responds to a foreign exchange market moderated by the Central Bank of the Republic and based on supply and demand. However, taking the average annual purchase and sale of dollars from 1992 to 2014, we can observe some predictive indicators of the rise or fall of the dollar.

If we take the annual exchange spread (that is, the difference between the purchase rate and the sale rate) from 1992 to 2014 (information provided by the BCRD) we can see that the years 1995, 2003 and 2004 show abrupt increases of 5.04%, 64.5% and 65.6% respectively compared to the previous year.

In this article we will analyze in detail, the exchange margin of the years preceding these abrupt increases in the dollar premium over the Dominican peso. We take this variable into account because we understand that all the factors that affect the rise or fall of premium are expressed in the spread, since this tells us how much a financial institution is willing to exit from a strong short position to a weak long currency position.

 In the years 1992-1993 the exchange spread was US$0.8 and US $0.10 for every dollar, but what happened to the spread in 1994 (on the eve of the dollar’s abrupt rise)? In the data provided by the BCRD, it is clearly observed that in 1994 the spread rose to US $0.14 for every dollar. A 40%  increase! With this percentage increase (even with an exchange rate without much volatility) it is not surprise that in 1995 the dollar rate rose from US $ 12.84 to US $ 13.49 when purchased in the spot market.

Let’s see now what happens with the margin in the years prior to the exchange rate increase of 2003 and 2004, that is, the years 2000 and 2001. In these years we note that the spread is US $0.07 and US $0.08 for each dollar … very regular ; while in 2002 we see a brutal increase in the margin of US $0.12 per dollar, a 68% increase compared to the previous year.

Good, but is this information useful for DR residents? The short answer is, yes. Since the national currency is weaker than the US dollar and most investors are helding DOP$, we recommend paying close attention to the exchange rate, but most importantly the spread of the exchange as a future indicator of trend. Of course, this will depend on many  externalities such as the valuation of the US currency, national trade balance, increase in tourism sectors, remittances and other factors.