The Squeeze: When a Strong Peso Hurts

2026-08-22

Published 2026-08-22. All figures as of August 21–22, 2026, linked inline: FX from TradingEconomics, rate decisions from Banco de la República, exports from DANE via TradingEconomics, ratings from S&P, Moody's, Fitch, and Fitch's Richard Francis.

The Squeeze: When a Strong Peso Hurts

If you remember the dollar at 3,800–4,000 pesos, you're not wrong — that was a year ago. On August 21, 2026, the dollar closed at 3,051 pesos, down 24% in twelve months and at levels not seen since 2019. The peso didn't get weaker. It got too strong — and the strength is doing exactly what a weak peso was supposed to do, in reverse.

Colombia is being squeezed from both ends. The exporters can't sell cheap. The importers can't buy cheap. And the interest rate that could balance the equation — the one number the country actually controls — is stuck at 12%, because cutting it would reignite the inflation it was raised to kill.

This is the story of that bind. It's a story about what happens when a country's best asset — a currency that global money suddenly wants — collides with an economy that earns dollars and pays pesos.

TL;DR — for the people who will skim this:

• The peso gained 24% in a year (dollar: 3,919 → 3,038). Strongest since 2019. It's not a miracle — it's a 12% policy rate paying a 6% real return, the widest carry anywhere
• Exporters are being crushed because they earn dollars and pay pesos. Coffee exports -49.9%, cut flowers -20% (Jan–Apr). Commodities can't raise prices — a coffee grower can't bill the world more because his peso is strong. A Cuban cigar has pricing power. Coffee doesn't
• Imports don't get cheap either. The 19% IVA is charged on the duty-inclusive CIF value, so a typical consumer import carries a 30%+ total tax burden. Households never feel the strong peso at the register
• Remittances ($11.8B/yr, 3× coffee exports) now buy 22% fewer pesos than a year ago
• Rates can't come down: inflation is 6.14% against a 3% target, expectations are 6.6%, and BanRep just spent six months hiking — from 9.25% to 12% — for the first time in 33 months
• The credit readings: Moody's Baa3 (last rung of investment grade), S&P BB-, Fitch BB — and the 10-year bond yields 11.94%, roughly flat against the policy rate, which is the bond market's way of saying there is no term premium left
• The bind: a strong peso crushes exporters; a weak peso would crush inflation. Colombia loses either way — unless the new government's fiscal credibility (de la Espriella's budget freeze, September tax reform) lowers the risk premium that the carry trade is compensating for

{"type":"line","title":"USD/COP — monthly closes","labels":["Aug '24","Sep '24","Nov '24","Dec '24","Jan '25","Feb '25","Mar '25","Apr '25","May '25","Jun '25","Jul '25","Aug '25","Sep '25","Nov '25","Dec '25","Jan '26","Feb '26","Mar '26","Apr '26","May '26","Jun '26","Jul '26","Aug '26"],"datasets":[{"label":"USD/COP","data":[4179,4413,4423,4403,4160,4130,4126,4129,4035,4187,3979,3919,3858,3692,3740,3652,3764,3675,3651,3443,3122,3075,3038],"color":"#d19a66","points":true}],"yFormat":"number","caption":"Monthly closes, Yahoo Finance. The peso has appreciated 24% in 12 months and 32% from the 2024 peak."}

The Carry Trade That Did It

Banco de la República's policy rate is 12% — the highest since April 2024, after a 100bp hike in January (the first hike in 33 months), another 100bp in March, and 75bp on June 30. Inflation is 6.14%. Do the subtraction: a real return near 6%, among the widest anywhere on earth.

That number is a magnet. Global money — funds, pension managers, carry desks — borrows cheap dollars and buys Colombian pesos to earn that 6%. It's the cleanest trade in emerging markets, and it's been running all year. The peso did exactly what the trade predicts: it appreciated 5.1% in the last month alone, and 24% in a year, hitting levels not seen since 2019 (Briefs). BanRep has even started a reserve accumulation program of up to $4 billion to slow the appreciation down (BBVA Research) — the central bank literally buying dollars to stop its own currency from getting too strong.

The market has noticed the contradiction. Bancolombia says the peso has "detached from its fundamentals" and projects $3,400–3,650 in the second half (Finance Colombia). Corficolombiana expects a correction back toward COP 3,700–3,800, "levels consistent with the risk premium" (Bloomberg Línea). Goldman Sachs went the other way — cutting its forecast to $3,350 in three months, $3,300 in six (El Colombiano). The range of opinion on where the dollar "should" be spans 800 pesos. That's what a detached currency looks like.

The Export Squeeze: Coffee Can't Raise Prices

Here's the mechanism, in one sentence: Colombian exporters earn dollars and pay pesos. When the peso appreciates, their dollar revenue converts into fewer pesos, while their costs — labor, land, fertilizer, transport — stay in pesos. The margin gets squeezed from the revenue side, and there is nothing they can do about it.

That would be survivable if Colombian exports had pricing power. They don't. The export basket is commodities — oil, coal, gold, coffee, flowers, bananas, palm oil, sugar, avocados — all of them price-takers in world markets. A coffee grower cannot bill the international buyer more because the peso got strong; the world price is set in dollars, by Brazil and Vietnam, and Colombia takes it. The asymmetry is brutal: a Cuban cigar has pricing power — scarcity, brand, ritual, a government that controls supply. A bag of Colombian coffee is interchangeable with a bag of Brazilian coffee, so the grower absorbs the entire currency shock himself.

The numbers show exactly that. Total exports rose 14.2% in the first half to $27.8B — but that's oil, coal and a gold surge. The agricultural dollar-earners collapsed: coffee exports -49.9% and cut flowers -20% in the first four months of 2026 (TradingEconomics / DANE). Coffee — the product Colombia is famous for, at a moment when world coffee prices are at record highs — shipped half as much value. The associations representing coffee, bananas, avocados, flowers, sugar and palm oil issued a joint complaint that the exchange rate is "no longer a temporary phenomenon" and demands a response from the incoming administration (Colombia One). Think tank Anif says the appreciation is directly pressuring coffee export revenues (StoneX).

If Colombia exported specialty goods with pricing power, a strong peso would be a wealth signal — you sell fewer dollars' worth, but each one is irreplaceable, and the currency strength just means the country got richer. That's the Cuban-cigar world. Colombia lives in the commodity world, where currency strength is a payroll cut.

The Import Squeeze: 19% Is Not a Small Number

Now the other end. In theory, a strong peso makes imports cheaper — the dollar buys less, so foreign goods should cost less in pesos. Colombia's households should be feeling a discount at the register. They're not.

The reason is the 19% IVA, charged at the border on the duty-inclusive CIF value of the import. Add the MFN tariff on top — 15% on a typical consumer electronic, for example — and a standard non-preferential import carries a total tax burden of roughly 34% before it reaches a shelf (Carra Globe). The strong peso discounts the dollar price of the goods — and then the tax system adds 30% back. The discount never reaches the consumer.

Meanwhile the things households actually buy — food, rent, transport, energy — are priced in pesos and inflating at 6.14%. So the strong peso has produced no import relief for the poor, no cheapening of the basket, while the exporters' revenue collapses. The country is squeezed from both ends: the exporters can't export profitably, and the importers can't import cheaply. The exchange rate that was supposed to rebalance the economy has instead become a tax on everyone who earns dollars and a gift that never arrives for everyone who spends pesos.

Add the remittance channel and the squeeze touches families directly. Colombia receives $11.8 billion a year in remittances — 2.3% of GDP, 79% of oil exports, three times coffee exports (BBVA). A family in Medellín that received $300 a month from abroad got 3,919 pesos per dollar a year ago; they get 3,038 now. That's 22% less purchasing power, same dollars sent. March 2026 remittances were up 12.5% in dollars (Rio Times) — the senders are working harder just to stand still in pesos.

The Bind: Why Rates Can't Come Down

The obvious prescription for a too-strong peso is to cut rates — cheaper pesos, less carry, weaker currency, happier exporters. BanRep can't do it. The Board spent six months hiking to 12% precisely because inflation stopped falling: 5.3% in November, then expectations jumped, and the January hike followed 33 months without one. June inflation printed 6.14% (core 6.0%), July is tracking 6.2%, and the analyst survey now sees 6.6% for 2026 — more than double the 3% target (Rio Times, Rio Times).

So the rate is doing two jobs that pull in opposite directions: it's defending the peso (by attracting carry) and fighting inflation (by cooling demand) — and both jobs require it to stay at 12%. The exporters' pain is the price of the inflation fight. The surveys say no cut before Christmas (Rio Times). Every month the rate stays at 12%, the carry trade stays profitable, the peso stays strong, and the coffee grower's margin stays squeezed. The mechanism that is supposed to rebalance the economy — the interest rate — is locked in place by the exact problem it's causing.

The Credit Readings: One Foot in Junk

And underneath all of it sits the fiscal question — the reason the peso's strength is a vulnerability rather than a verdict. This is the "credit reading of the nation" that markets actually trade on:

Every agency downgraded Colombia within the last 15 months: S&P twice (June 2025, then April 2026), Fitch in December 2025, Moody's in June 2025. The reason is always the same: the fiscal deficit. Fitch's lead analyst Richard Francis warned on August 18 that the 2026 deficit lands near 7% of GDP (Rio Times); Fitch's formal forecast was 7.5% against a government target of 6.2%, after Congress rejected the revenue measures that would have closed the gap (Investing.com).

The market price of this is the 10-year yield: 11.94% (TradingEconomics) — essentially flat against the 12% policy rate. Investors demand no term premium for lending to Colombia for a decade; the real return they're getting is the carry, and the carry is the whole trade. If the fiscal story doesn't improve, the carry trade is not a sign of health — it's a loan to a country that is spending 7% of GDP more than it takes in, priced as if the risk doesn't exist.

That's what the incoming government is actually being asked to fix. President-elect Abelardo de la Espriella takes office having promised to freeze the 2026 budget on day one, cut the state apparatus by up to 40%, resume fracking, eliminate the financial-transactions tax, and deliver a pro-market tax reform in September (Economics Observatory, Rio Times, HSF). If he delivers, the risk premium falls, the carry trade becomes less necessary, and BanRep gets room to cut without reigniting the peso's collapse. If he doesn't, the country is a junk-rated sovereign paying 12% to keep its currency strong enough to destroy its exporters.

The 4,000 Scenario: The Squeeze Would Flip, Not End

The analysts' fair-value range for the dollar runs from Goldman's 3,300 to Corficolombiana's 3,800. The 4,000 level — the number people remember from last year — is now the tail scenario: the carry trade unwinding on a global risk-off, a faster-than-expected Fed cutting cycle, or a credibility failure in the new government's fiscal program. Some houses still carry it as a real probability rather than a rounding error.

Here's the part that matters: a return to 4,000 wouldn't end the squeeze. It would flip it. A weak peso would relieve the coffee grower and crush everyone else — importers would face a 34% tax burden on top of a collapsing currency, inflation would re-accelerate past 6.6%, and BanRep would have to hike back toward 13%+ to defend the peso, which would slow the economy that Fitch expects to grow just 2.7% this year. The strong peso squeezes exporters; the weak peso squeezes everyone who buys anything. There is no exchange-rate level at which a country that exports price-taker commodities and imports taxed goods isn't squeezed. The only way out is not a better exchange rate — it's a better export basket (specialty, branded, scarce — the Cuban-cigar side) and a better fiscal position (lower risk premium, lower rates, weaker carry, saner peso).

What to Watch

• BanRep's $4B reserve accumulation — the central bank buying dollars against its own rally; the pace of intervention is the fastest signal of policy intent
• The September tax reform — de la Espriella's first real test; markets will price it in days, not months
• The budget freeze — whether the deficit path toward 7% actually bends
• Coffee and flowers — the two canaries; any stabilization in coffee export values is the first sign the peso pain is passing
• December CPI — if it prints near 6%, the "no cuts before Christmas" consensus becomes "no cuts before mid-2027"
• The 10-year yield vs the policy rate — the spread is the market's verdict on whether the carry trade is a trade or a loan

The closing line is the one every Colombian already knows from living it: the country earns dollars and pays pesos — and right now the dollars are worth less, the pesos cost more, and the interest rate that connects them is frozen at a level that hurts both sides. A strong currency is supposed to be the reward for good policy. Colombia's is the bill for the policy that hasn't arrived yet.

Sources: Banco de la República (policy rate, monetary policy implementation); BBVA Research (rate path, reserve program); TradingEconomics (FX), TradingEconomics (exports), TradingEconomics (10Y); Rio Times (inflation), Rio Times (expectations), Rio Times (Fitch/Francis); Reuters (S&P & Moody's June 2025 cuts); Finance Colombia (S&P Apr 2026); Colombia One (Fitch Dec 2025); Colombia One (ag associations); Anif via StoneX; BBVA (remittances); Bloomberg Línea (Corficolombiana); El Colombiano (Goldman); BanRep BoP (current account). FX series: Yahoo Finance monthly closes. Corrections: none yet — will update as the September tax reform, the budget freeze, and the December CPI land.