Bloomberg News

Peru’s Central Bank Buys $680 Million, Most Since August

October 19, 2012

Peru’s central bank bought $680 million in the currency market this week, the most in two months, as policy makers seek to slow gains in the currency spurred by surging overseas borrowing by local companies.

The purchases are the most since the week ending Aug. 17, when it bought $709 million, and come after the sol climbed to its strongest level in 15 years.

Companies boosting investment to meet growing domestic demand are tapping foreign banks and capital markets for financing in dollars, fueling U.S. currency inflows. Policy makers raised reserve requirements for a second month in October to cool credit demand.

“Foreign banks are lending to domestic firms, that’s why there is a surplus of dollars in the economy,” said Pedro Tuesta, a Washington-based Latin America economist at 4Cast Inc. The central bank believes “financing in dollars is growing too fast,” he said.

The sol depreciated less than 0.1 percent to 2.5790 per U.S. dollar at today’s close, according to Deutsche Bank AG’s local unit. The currency earlier touched 2.5775, the strongest since December 1996, data from Peru’s financial regulator show.

Demand for soles also stems from exporters paying local income tax, said Gonzalo Navarro, the head trader at Banco Santander, in an e-mail to clients.

The central bank has bought $12 billion this year to slow gains in the sol. The bank will let private pension funds invest more abroad to cool demand for the local currency, bank president Julio Velarde said Oct. 3.

The yield on the nation’s benchmark 7.84 percent sol- denominated bond due August 2020 declined one basis point, or 0.01 percentage point, to 4.25 percent, according to prices compiled by Bloomberg. The price rose 0.03 centimo to 123.49 centimos per sol.

The extra yield investors demand to own Peruvian government bonds instead of U.S. Treasuries rose eight basis points to 99, according to JPMorgan Chase & Co.

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

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


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