Peru: Peruvian sol continues to slide amid struggling economy and looming Fed interest rate hike
August 7, 2015
The Peruvian sol (PEN) continues to lose value against the dollar. On 5 August, the sol traded at 3.21 PEN per USD, which was a sharp 14.0% weaker than on the same day last year. The sol has slipped 7.3% against the dollar so far this year and now stands at its weakest level relative to the greenback in over six years.
The depreciation of the sol in the past several months coincides with the ongoing weakness in the Peruvian economy as the export sector decelerates and commodity prices decline. Moreover, the slide also reflects markets’ expectation that the U.S. Federal Reserve will begin raising interest rates later this year. These external factors are decreasing demand for emerging market assets and currencies, including the Peruvian sol.
The Peruvian Central Bank has responded to the depreciation through repeated interventions in the foreign exchange market. The Bank sold more than USD 200 million in the past month, pushing its total for the year above USD 5 billion mark. 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