Bloomberg News

Chile Urges Central Bankers to Consider Curbing Peso Rally

February 13, 2012

(Updates with peso market opening in sixth paragraph.)

Feb. 13 (Bloomberg) -- Chile’s central bank should consider joining its peers and resume dollar purchases to curb a rally in the peso, South America’s best-performing currency in the past month, Deputy Finance Minister Julio Dittborn said.

“Obviously it’s a concern that the peso is strengthening so much,” he said in a telephone Feb. 10 interview, when he was acting Finance Minister during Felipe Larrain’s vacation. “The central bank should evaluate whether it is appropriate to intervene again or not like it’s done in previous years.”

The peso has appreciated 6.2 percent in the past month and 8.1 percent since the central bank ended daily auctions on Dec. 16 through which it bought $12 billion last year. The currency of the world’s largest copper producer may continue to strengthen on rising metal prices, Leonardo Suarez, chief economist at Larrain Vial SA, said on Feb. 9.

The government, whose fiscal policy doesn’t have a “strong” influence on the exchange rate, isn’t studying measures to weaken the peso, Dittborn said. The ministry instead will take care not to implement measures that strengthen the currency. Whether to buy dollars is a decision for the central bank, he said.

Colombia started buying at least $20 million a day to weaken its currency on Feb. 6, while Brazil’s central bank bought dollars in the currency forwards market on Feb. 3 for the first time since July.

‘Red-Flag Zone’

The Chilean peso gained 0.7 percent to 476.13 per U.S. dollar as of 8:30 a.m. in Santiago, according to prices from Datatec, an interbank and over-the-counter trading system.

“As we approach the red-flag zone of 470 to 460 pesos, the first thing you’d expect to see is government verbal intervention,” said Alex Pigatto, a trader at Nomura Securities Inc. in New York.

If the central bank keeps its benchmark interest rate on hold at 5 percent, the probability of a central bank intervention in the currency increases, he said.

“It’s important to us that prices in the economy remain aligned with long-term prices,” Dittborn said. “If the price of the dollar falls a lot now, it’s a concern for some assets.”

Chile’s fruit producers’ federation, known as Fedefruta, has asked the central bank to take steps to weaken the peso, Antonio Walker, president of the industry group, said by telephone last month.

Not Time

Chile’s central bank, which operates under a flexible exchange-rate regime, intervened in the currency twice under the former bank President Jose De Gregorio.

Rodrigo Aravena, chief economist at Banchile Inversiones in Santiago, said it was premature to expect Chile’s central bank to resume dollar purchases now.

“We’re far from an intervention,” he said by phone Feb. 10. “The real exchange rate is above the levels of the previous interventions. It’s not the right time.”

The peso would have to strengthen to 463 per dollar for the real exchange rate to match levels when the central bank intervened in 2011, Jorge Selaive, chief economist at Banco de Credito & Inversiones, said by telephone Feb. 10.

Policy makers could achieve the same effect on the peso as they did in 2011 by buying $3 billion in dollars because the bank has started to reduce borrowing costs, he said. By contrast, the central bank raised its key interest rate five times in the first half of last year.

“Any exchange-rate intervention would probably be more successful than in 2011 because the monetary policy tendency is for easing,” Selaive said.

Stimulus Measures

The government also is “far” from taking steps to stimulate growth, with the economy expected to expand between 4 percent and 5 percent this year, Dittborn said.

The jobless rate was 6.6 percent in the three months through December, the lowest rate since before the recession of 2009, while gross domestic product expanded an estimated 6.3 percent in 2011, he said.

Dittborn, 60, has a Master’s in Economics from the University of Chicago and has taught at schools including the University of Chile, the Pontifical Catholic University of Chile and Andres Bello University. He was a member of Congress from 1997 to 2009.

--Editors: Philip Sanders, James Attwood.

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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