June 8 (Bloomberg) -- Colombia’s peso fell the most in six weeks on speculation the U.S. Federal Reserve may boost interest rates while the South American country reduces borrowing costs, making the nation’s fixed-income assets less attractive.

The peso fell the most since April 27, weakening 1.4 percent to 2091.80 per dollar at 3:20 p.m. New York time, from 2,064 on June 5.

“People are thinking the Fed might start to increase interest rates in the short term, so the Colombian peso is looking overvalued today,” said Daniel Arguelles, senior foreign exchange trader at Bogota-based brokerage Corredores Asociados. “I see a retreat among all Latin American currencies with the peso moving to 2,150 this week.”

CME Group futures showed a 62 percent chance the Fed will increase the target rate for overnight lending between banks to at least 0.5 percent by its November meeting, compared with 26 percent odds a week ago. Colombia’s central bank has cut the overnight lending rate to 5 percent from a seven-year high of 10 percent last year.

Inflation in Colombia slowed to 0.01 percent in May, from 0.32 percent a month earlier, the national statistics agency said in a June 5 report published after markets closed. That was less than the 0.21 percent median estimate in a Bloomberg survey. Annual inflation eased to 4.77 percent in May, within the central bank’s 4.5 percent to 5.5 percent target.

‘Disinflation’

“Strong disinflation and weak economic growth” will allow Banco de la Republica to cut the overnight lending rate to 4 percent this year, Alberto Bernal, head of emerging markets research at Bulltick Securities Corp, wrote in a report today. He previously forecast the central bank would cut the rate to 4.5 percent. He expects annual inflation will slow to 3.7 percent by year-end.

The peso will strengthen to 2,000 by the end of the year on the back of a weaker U.S. dollar and higher commodity prices, according to Bernal.

The yield on Colombia’s 11 percent bonds due in July 2020 surged 31 basis points, or 0.31 percentage point, to 9.65 percent. It has jumped 84 basis points in the past month. The bond’s price slid 2.214 centavos to 108.916 centavos per peso, according to Colombia’s stock exchange.

The slump in peso bonds is a “huge buying opportunity,” Bernal wrote. He predicts the yield will drop to 7.5 percent by the end of 2009.

Peru’s sol declined 0.6 percent to 2.9855 per dollar, from 2.9672 on June 5. The currency will strengthen to 2.9 by year- end, Cesar Liendo, an economist Scotiabank Peru, wrote in a report today. He previously forecast the sol would end the year at 3.25.

Chilean Peso

The yield on the Peru’s 8.6 percent sol-denominated bond due August 2017 climbed four basis points to 5.52 percent, according to Citigroup Inc.

In Chile, the peso declined 0.4 percent to 568.65 per dollar, from 566.57 on June 5. The yield for a basket of the country’s 10-year peso bonds in inflation-linked currency units, called unidades de fomento, fell one basis point to 3.18 percent, according to Bloomberg composite prices.

Argentina’s peso fell 0.1 percent to 3.7579 per dollar, from 3.7555 on June 5. The yield on Argentina’s inflation-linked peso bonds due in December 2033 rose 11 basis points to 18.42 percent, according to Citigroup Inc.’s local unit.

Venezuela’s bolivar gained 0.6 percent to 6.75 per dollar in the unregulated market from 6.79 at the end of last week, traders said. The government pegs the currency at an official exchange rate of 2.15 per dollar under restrictions it imposed in 2003.

To contact the reporters on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net; Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

Last Updated: June 8, 2009 15:53 EDT