Latin American banking faces dollarization risks and currency volatility

Banking systems in Latin America face a dual reality regarding dollarization. While using the U.S. dollar for deposits and loans supports credit growth and funding diversification, it exposes institutions to exchange rate and liquidity risks. Although dollarization is gradually decreasing across the region—with foreign currency deposits falling from nearly 40% to approximately 34% of total deposits over the last decade—the trend is inconsistent. Uruguay maintains the highest levels of dollarization, whereas Argentina has seen an increase to 28% of total deposits.

In Mexico, Moody’s Analytics suggests that the recent strength of the peso, often termed the ‘superpeso,’ is not driven by fundamental economic growth or productivity. Instead, the currency's performance is attributed to interest rate differentials, high liquidity, and a weak U.S. dollar. The analysis notes that inflation and productivity differentials do not fully explain the peso's strength, as Mexican inflation has recently been higher than that of the United States, a condition that typically exerts downward pressure on a national currency.