Peru: Peruvian sol hits 3.10 per USD barrier despite ongoing Central Bank operations
March 12, 2015
The Peruvian sol (PEN) continues to lose value against the dollar. On 11 March, the sol traded at 3.10 PEN per USD, which was 10.6% weaker than on the same day last year. The sol has slipped 3.6% 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 few months coincides with a progressive weakening of 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. Between 1 March and 10 March alone, the Bank sold a cumulative USD 1.2 billion. This sum already surpasses the monthly totals tallied since September, when the government began selling foreign exchange reserves at a fairly aggressive pace. 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