Colombian peso rebounds as dollar and yields rise

Brent crude near $100 a barrel has helped cushion the peso by bringing in more foreign exchange, while the Banco de la República’s 12% policy rate continues to make peso assets attractive to global investors seeking yield. That trade has been central to Colombia’s resilience: when local rates are well above U.S. benchmarks, investors can borrow cheaply in hard currency and buy higher-yielding local debt, a classic carry strategy.

But the environment is becoming less forgiving. The Federal Reserve has resumed rate increases, taking its benchmark range to 3.75%-4%, and the European Central Bank has also tightened, keeping the dollar supported. U.S. 10-year yields have climbed to levels not seen in nearly two decades, intensifying pressure on emerging-market debt denominated in dollars and narrowing the margin of safety for risk assets.

That has not yet broken demand for local-currency emerging-market bonds. A Bloomberg gauge of domestic-currency EM debt has outperformed dollar-denominated EM bonds by more than three percentage points since late June, its best quarterly showing since 2022. The setup still favors markets with high real yields and solid external accounts, which is why Latin America remains a preferred destination for some managers.

“Current valuations lead us to prefer local-currency debt over hard currency debt at this point in the cycle,” Robeco emerging-market debt chief Diliana Deltcheva told Bloomberg, arguing that local markets still offer a wider set of opportunities and that spread compression in hard-currency bonds looks increasingly limited.

The broader backdrop is still constructive for Colombia relative to its peers. The MSCI emerging-market currency index is on track for a second straight year of gains, helped by improving liquidity conditions and a continued search for yield. Bloomberg data also shows the correlation between local-currency EM bonds and the dollar has moved to its most negative level in about a year, reinforcing the idea that any further dollar rally could quickly feed through to EM prices.

For investors, that leaves the Colombian peso in a delicate balance. The bull case is straightforward: high rates, strong export receipts and tourism inflows can keep supporting the currency and local debt. The bear case is equally clear: if the Fed keeps tightening, U.S. yields rise further, or geopolitical shocks lift risk aversion, capital could rotate out of carry trades and back into the dollar.

The immediate implication is that Colombia’s currency may continue to outperform many emerging-market peers, but only as long as global dollar liquidity stays manageable and domestic policy remains credible. A renewed dollar surge would likely hit hard-currency EM debt first, but it would eventually pressure local currencies too, including the peso.