The Chilean peso fell to the lowest in almost three weeks as concern European leaders meeting this week will fail to control the region’s sovereign debt crisis damped demand for riskier assets.

The peso plunged 1.1 percent to 508.78 per U.S. dollar, the weakest closing level since June 5. The Bloomberg JPMorgan Latin American Currency Index fell 0.3 percent as of 2:21 p.m. in Santiago.

Global stocks declined and the euro weakened before the two-day summit in Brussels on June 28 and 29 where European Union leaders will seek a solution to the region’s debt crisis. German Chancellor Angela Merkel today again rejected joint euro- area bonds to alleviate the situation, saying shared debt in the 17-nation euro area would be counterproductive.

“This is the week the market has been anxiously awaiting for a long time: We will see if Germany is willing to put its hands in its pockets,” said Cristian Donoso, a trader at Banchile Corredores de Bolsa SA in Santiago. “In the meantime there is an aversion to risk and a flight to the safety of the dollar, Treasury bonds and bunds. Given how international markets are evolving the dollar could keep strengthening.”

International investors in the Chilean peso forwards market had a $10 billion short peso position on June 21, according to data published today by the central bank.

Indicators of traders’ inflation expectations fell today in Chile. One-year breakeven inflation declined nine basis points to 2.25 percent, the lowest since August. Two-year breakeven inflation fell four basis points to 2.32 percent.

The forwards market for unidades de fomento, Chile’s inflation-linked currency unit, showed traders wagering on 1.91 percent price rises this year. Annual inflation may slow to 1.75 percent in February, according to forwards trading.

“Even though the peso has depreciated, commodity prices have fallen more,” said Katia Diaz, an economist at 4Cast Inc. in New York.

Two-year interest-rate swaps fell 10 basis points to 4.49 percent and one-year swaps fell eight basis points to 4.61 percent.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net