Peru: Peruvian sol remains weak
September 10, 2015
The Peruvian sol (PEN) recovered some ground in the past week after pushing to 3.31 PEN per USD on 26 August, but continues to trade at historically weak levels. On 10 September, the sol traded at 3.22 PEN per USD, which was a sharp 12.8% depreciation over the same day last year. The sol has slipped 7.7% against the dollar so far this year and is lingering at the weakest level 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 the impact of the devaluation of the Chinese yuan and markets’ expectation that the U.S. Federal Reserve will begin raising interest rates later this year. These external factors are decreasing demand for Peruvian assets and currency.
The Peruvian Central Bank has responded to the depreciation through repeated interventions in the foreign exchange market. The Bank sold more than USD 1 billion in August alone, pushing its total for the year above the USD 6 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