Peru’s Sol Falls as Government Boosts Efforts to Offset Inflows

By John Quigley - 2013-02-19T20:23:46Z

(Bloomberg) Peru’s sol touched the lowest level in two weeks after the government said it’s ready to boost dollar purchases to weaken Latin America’s best-performing currency of the past year.

The sol (PEN) dropped 0.2% to 2.5820 PEN/USD at today’s close, extending its decline this year to 1.2%, according to prices compiled by Bloomberg. It earlier fell to 2.5850 PEN/USD, the weakest intraday level since Feb. 1. Other Latin American currencies also depreciated against the dollar. The Argentine peso closed at 5.0217 ARS/USD, a 0.21% change, and the Chilean peso closed at 472.08 CLP/USD, up by 0.05%.

Finance Minister Miguel Castilla said yesterday the government may expand a plan to sell soles to buy USD 4 billion in the foreign exchange market. The sol advanced 5.4% percent last year, the fastest pace since 2009, even after the central bank bought a record USD 13.9 billion to offset inflows amid increased demand for the government’s local currency bonds.

The authorities are “trying to remove the market’s one- sided bets” against the dollar, said Alejandro Cuadrado, the head of Latin American currency strategy at Banco Bilbao Vizcaya Argentaria SA in New York. “The more they can keep investors on the sidelines, the more effective the policy can be.”

The sol’s 3.9% gain in the past year is the strongest among the six most-traded Latin American currencies tracked by Bloomberg.

Most of the dollars flowing into Peru’s USD 200 billion economy stem from long-term investment projects and financing, and the government is more concerned about short-term flows causing “accelerated appreciation” in the sol, Castilla told reporters yesterday.

The finance ministry will use USD 1.8 billion of the dollars it buys to prepay multilateral loans, USD 1 billion to service debt and USD 1.2 billion to boost the government’s contingency fund, he said.

Castilla said the ministry decided against issuing bonds to finance debt servicing this year and will draw on tax revenue instead. The government doesn’t plan to buy back dollar- denominated bonds because prices are too high, he said.

The central bank said on its website it bought USD 10 million today. It’s bought USD 3.3 billion this year, boosting Peru’s international reserves to a record USD 67.6 billion.

The yield on Peru’s benchmark 7.84% sol-denominated bond due August 2020 declined two basis points, or 0.02 percentage point, to 3.75% at 2:30 p.m. in Lima, according to prices compiled by Bloomberg. The price climbed 0.11 centimo to 126.34 centimos per sol. Similar long U.S. government bonds yield 2.03%.

To contact the reporter on this story: John Quigley in Lima at