Noboa Locks Ecuador Into the Dollar as Argentina Weighs Currency Competition in Latin America

Ecuador has officially embraced the US dollar as its sole legal tender, following President Daniel Noboa's issuance of Decree 565 on March 18, 2025. The move comes after the country's previous currency, the sucre, experienced astronomical inflation rates. Before dollarization, annual inflation in Ecuador hit nearly 96 percent in 2000, before dropping to a low of 0.4 percent by 2017.

Argentina, under President Javier Milei, is considering whether currency competition can bring the benefits of dollarization without the drawbacks. If successful, a hybrid approach could help control inflation without relinquishing full monetary sovereignty. In contrast, Venezuela and Cuba have informally adopted the US dollar due to hyperinflation and the collapse of their respective currencies, rather than through deliberate policy choices.

By fully embracing the US dollar, Ecuador has reduced its inflation from around 52 percent to as low as 0.4 percent. However, the trade-off involves giving up the ability of the Central Bank to issue alternative currency and the creation of an independent exchange rate. Investors view the dollarized bloc as low-inflation and growth-volatile, while informal dollarization in Venezuela and Cuba signals state failure.

Panama, the region's oldest dollarized economy, has a dual currency system with the balboa and US dollar fixed at a 1:1 ratio since 1904. While only balboa coins exist, US dollar banknotes serve as the primary means of transaction. The balboa's role is symbolic, serving as a unit of account and national symbol without any monetary policy function.