Chile Reviewing Dollar-Purchase Program as Peso Slumps, De Gregorio Says

Chile’s central bank is reviewing its dollar-purchase program after the peso slumped, bank President Jose De Gregorio said yesterday, less than a month after stating that policy makers had no plans to change the program’s time line. The peso strengthened today.

“We will have to evaluate,” he said in an interview on a day when the peso plunged against the dollar more than any other currency. “As we announced since we started, we will continue evaluating and look at what is really driving the market.”

Emerging market currencies tumbled yesterday after data showed manufacturing contracted in China and the U.S. Federal Reserve warned of “significant” risks to the world’s largest economy. The real’s decline prompted Brazil’s central bank to enter the derivatives markets for the first time in two years to prop up the currency.

Chile’s central bank has been buying $50 million a day since Jan. 5 in a bid to weaken the peso and boost international reserves. De Gregorio told lawmakers on Sept. 7 the bank had no plans to change the policy and the market expected the program to end in December as scheduled.

The bank had to cut short its previous dollar-purchase program in September 2008 after Lehman Brothers Holdings Inc. collapsed, triggering a slump in emerging market currencies. The peso fell to 638.50 per U.S. dollar by the end of 2008 from 439.50 on April 1.

The peso erased a loss earlier today and gained 0.5 percent to 518.35 per dollar as of 8:57 a.m. New York time, after tumbling 4 percent yesterday. The currency has lost 11 percent since De Gregorio said policy makers didn’t intend to change the intervention schedule on Sept. 7.

Copper Slump

The peso was hit yesterday as the price of copper, which accounts for more than half of Chile’s exports, fell 8.3 percent to a one-year low of $3.4535 a pound for December delivery. The metal is down another 5.4 percent today.

“Conditions in the last few weeks have been pointing toward a depreciation of currencies of countries that are commodity exporters,” De Gregorio said in Washington yesterday. “If you look at weekly or monthly data, the Chilean currency is behaving as many other currencies from emerging markets.”

The Mexican peso fell 2.8 percent against the dollar yesterday, followed by a 1.9 percent decline in the Colombian peso and a 1.6 percent deterioration in Brazil’s real.

Dollar Strength

“We don’t know how far this will go,” Brazil’s Finance Minister Guido Mantega told reporters in Washington after a meeting of finance officials from Brazil, Russia, India, China and South Africa. “There’s a depreciation of all currencies against the dollar.”

Chile’s dollar-buying program limited the peso’s gains earlier this year even as the central bank raised its key interest rate five times. Policy makers now have room to follow Brazil’s lead by reducing rates after keeping borrowing costs unchanged at 5.25 percent in the past three meetings, De Gregorio said.

“We are a country with a lot of space to cut rates, but whether we cut or not will depend on economic conditions,” he said. “We are flexible enough and proactive enough to make the appropriate decisions in the face of a bad world scenario.”

Chilean policy makers reduced their 2011 global growth estimate to 3.9 percent this month from 4.1 percent in June on the European debt crisis and weak labor markets.

‘Room for Maneuver’

“We are, both in monetary policy and in fiscal policy, among the economies that have more room for maneuver” in the face of global turmoil, Finance Minister Felipe Larrain said yesterday. “We are well-prepared, but not bullet-proof.”

The central bank may not immediately move to lower interest rates, which are the third-highest among major Latin American economies, De Gregorio said. Policy makers may decide to keep rates unchanged until they have a better idea what direction the global economy will take.

One-year interest rate swaps, which reflect traders’ views of borrowing costs, fell 4 basis points, or 0.04 percentage point, to 4.60 percent at 8:58 a.m. from yesterday.

“Perhaps there is no need to raise or to cut given the current world scenario,” De Gregorio said. “It’s very difficult to say which way we should go, but of course we have space because inflation is on target. We have a lot of flexibility on the monetary policy side to respond to different scenarios in the world economy.”

Inflation was 3.2 percent in August and 2.9 percent in July, according to the National Statistics Institute. The central bank targets 3 percent annual inflation plus or minus 1 percentage point over two years.

De Gregorio, who earned his doctorate in economics at the Massachusetts Institute of Technology, has been central bank president since December 2007 and is scheduled to step down this year.

To contact the reporters on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net; 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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