Uruguay: Uruguayan peso hits a multi-year low in September
September 8, 2015
In September, the Uruguayan peso depreciated to its weakest value against the U.S. dollar in over a decade, continuing the general depreciating trend that has been in place since June 2013. On 8 September, the peso traded at 28.7 UYU per USD, which was 0.7% weaker than on the same day of the previous month and 19.5% weaker in annual terms. The depreciation of the Uruguayan currency was mainly driven by increased demand for U.S. dollars, which is putting pressure on the peso. Demand for the U.S. dollar picked up as aversion to riskier currencies rose over the uncertainties surrounding the situation in Greece and August’s devaluation of the Chinese yuan as well as the following turmoil in emerging markets. In addition, the possibility that the U.S. Federal Reserve might start hiking interest rates this month already makes the USD more attractive for investors. The Uruguayan currency has lost 17.7% of its value since the beginning of this year.
The depreciation of the currency has pushed inflation to very high levels. In fact, in August, inflation reached 9.5%, which marked the highest rate in over a-year-and-a-half. In Uruguay, authorities are particularly keen to keep inflation below 10.0%, which is the ceiling above which labor contracts are entitled to a new round of wage negotiations. Against this backdrop, in August, the government resorted to price agreements with the country’s main supermarket chains to freeze the price of a basket of goods until 4 October. In this way, the government hopes to keep inflation to within one digit. Adding to that, the Central Bank continued to intervene in the foreign exchange market in order to slow the depreciation of the peso and to soften the depreciation pass-through effect to consumer prices.