Peru: Peruvian sol continues to depreciate
May 14, 2015
The Peruvian sol (PEN) continues to lose value against the dollar. On 14 May, the sol traded at 3.15 PEN per USD, which was a sharp 13.3% weaker than on the same day last year. The sol has slipped 5.3% against the dollar so far this year and now stands at its weakest level relative to the greenback in six years.
The depreciation of the sol in the past several months coincides with ongoing weakness in the Peruvian economy as the export sector languishes. Moreover, the slide also reflects falling commodity prices and markets’ expectation of a full normalization of monetary policy in the United States later this year. These external factors are decreasing demand for emerging market assets and currencies, such as the Peruvian sol.
The Peruvian Central Bank has responded to the depreciation through repeated interventions in the foreign exchange market. The Bank continues to sell U.S. dollars in the local market several times per week in an attempt to aid the sliding sol. The Bank sold USD 426 million in the first two weeks of May alone, pushing its total for the year close to USD 4 billion. The Bank has also reduced local currency bank reserve requirements to counteract the high local demand for dollars and increased liquidity in domestic currency.
Author: Carl Kelly, Economist