Peru's currency will continue to gain against the US dollar, despite official measures to slow its advance as foreign capital floods into the Andean country, currency traders and analysts say.
The Peruvian sol has risen 2.11 percent since the beginning of the year, after having gained 7.94 percent last year in spite of turbulence in global markets.
As worries over a potential double-dip recession intensify in the United States, Peru's fast-growing economy - set to swell 7 percent this year - has attracted a surge of capital.
That has forced the government and the Finance Ministry to scramble to find ways to stem the tide, which has come just as they moved to dampen the pace of growth to avert inflation. "We should interpret the (central bank's) measures as an effort to cool down the economy and at the same time reduce the pressure on the sol's gains," said Pedro Tuesta, an analyst with New York-based consulting firm 4CAST.
The central bank "should feel it has been effective if it keeps the exchange rate above 2.80 soles," he said. The sol rallied to a 23-month high last week of 2.809 soles per US dollar, prompting the central bank to buy nearly $500 million, a record amount for a single trading day.
In addition, the central bank eased rules to let local pension funds invest more cash abroad. It also raised deposit requirements on bank accounts denominated in soles and US dollars.
The Finance Ministry has said it too will start buying dollars on the local foreign exchange market. "What we want to do to prevent even more pressure being put on the exchange rate is to go into the market and actively buy dollars," Vice Finance Minister Luis Castilla told Reuters.
The central bank and Finance Ministry have made co-ordinated policy moves before. Earlier this year, the ministry cut spending by about $1 billion just as the central bank started to tighten monetary policy. Both efforts aim to keep inflation this year at around 2 percent. If the sol were allowed to rally too much, it might later lead to inflation in case foreign investors suddenly pull their cash out of Peru, causing the sol to quickly depreciate.
"The current disequilibrium in financial markets has exacerbated the probability of future capital flow reversals," Central Bank President Julio Velarde said this week.
The sol will close this year with a gain of more than 4 percent, bolstered by an inflow of foreign currencies attracted by high rates of return and the strength of the economy, according to analysts.
Comments
Comments are closed.