Peru: Peruvian sol continues to slide despite ongoing Central Bank operations
April 15, 2015
The Peruvian sol (PEN) continues to lose value against the dollar. On 15 April, the sol traded at 3.12 PEN per USD, which was a sharp 12.3% weaker than on the same day last year. The sol has slipped 4.4% against the dollar so far this year and now stands at its weakest level relative to the greenback in almost six years.
The depreciation of the sol in the past several months coincides with ongoing weakness in the Peruvian economy. 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 prop up the sliding sol. In its latest moves, the Bank sold USD 11 million and USD 177 million on 10 and 13 April respectively. Although these sums are smaller than previous interventions, the Bank has sold more than USD 2.8 billion so far this year. The Bank has been active through other channels, including credit swaps and repurchase agreements. 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