Peru: Sol debilitates and returns to levels last seen in September 2011
May 31, 2013
On 31 may, the Peruvian sol (PEN) traded at 2.74 per USD, which was 3.7% weaker compared to the last day of the previous month. In addition, the sol has lost 7.5% of its value against the USD so far this year, returning to levels last seen in September 2011.
The sharp weakening of the PEN against the greenback in May primarily reflects the recent speculation that the Federal Reserve is likely to start reducing its bond purchasing program. The program has buoyed large capital inflows into the country, spurred by mining investment and an increased appetite for higher-yielding assets in emerging markets. Consequently, the Peruvian sol strengthened interruptedly from the 3.27 PEN per USD peak registered on February of 2009 until the currency touched its bottom at 2.54 PEN per USD in December last year.
In recent months, the Central Bank has intervened heavily in the foreign exchange market to stem the gains of the local currency. In 2012, the Bank purchased a total of USD 13.9 billion, and monetary authorities have taken other measures such as increasing the average reserve requirement ratio on both for local and foreign currency deposits in order to stem the impact of capital inflows from abroad on the expansion of credit and, consequently, on the appreciation of the local currency.
Analysts polled by FocusEconomics Consensus Forecast are still pencilling in the recent developments and they expect the sol to trade at 2.55 PEN per USD by the end of the year. For 2014, the panel projects that the sol will close the year at 2.53 PEN per USD.
Author: Ricardo Aceves, Senior Economist