Latin America: Shedding Bad Habits; The falling dollar should have the region in a funk. But trade flows remain strong, and a weak greenback cheapens debt.(Cover Story)

Byline: Mac Margolis

For Latin Americans, the dollar has always been a mixed blessing. When the greenback is cheap, consumers splurge on imported goodies and take their holidays in Paris or Disney World--even as the region's trade balances go south. By rights, exporters ought to be in a funk--not least because the United States is their best customer. But that's not the case. In fact, exports are surging from Montevideo to Mexico City, buoyed by a resilient world economy and handsome prices for commodities like coffee, iron ore, oil and copper. Brazil is expecting a record $33 billion trade surplus for 2004, while one of every $10 generated in Argentina this year will come from exports.

The favorable trade winds are driving a hemispheric recovery that will see the 34 nations of the Caribbean and Latin America expand by 4.7 percent this year, according to the World Bank. What's more, in a region where prices are often tagged to the dollar, stronger local currencies will help staunch inflation. "No one can complain that the weaker dollar has made them uncompetitive," says Ricardo Amorim, Latin America analyst for the German bank WestLB. "What might otherwise be a problem has turned into an opportunity."

Easy money has long been Latin America's fatal attraction. During the 1990s, the region's businesses welcomed a tide of dollars, euros and yen that sloshed around the globe. And often, governments propped up their currencies through unrealistic exchange rates. Along came the international financial contagion, and investors fled from developing countries in droves. One by one enfeebled Latin economies buckled and were forced to devalue their currencies. Painful as they were, the devaluations made the region's exports more competitive. However, the debt burden spiked overnight as nations found they needed to make three or four more ...