Peru’s Sol Gains as Central Bank’s Absence Eases Dollar Squeeze

Peru’s sol posted its first two-day advance since January as the central bank stayed out of the currency market, easing demand for dollars.

The sol appreciated 0.2 percent to 2.5970 per U.S. dollar at today’s close, extending its two-day increase to 0.4 percent. The currency was little changed this week, according to data compiled by Bloomberg.

Banco Central de Reserva del Peru has limited its currency intervention this month to purchasing $10 million on March 5 after buying $3.4 billion in the first two months of the year and raising reserve requirements to weaken the sol. The central bank’s absence has eased a scarcity of U.S. currency and allowed interbank dollar rates to fall, according to Antonio Diaz, a trader at Banco Internacional del Peru in Lima.

“The central bank’s approach is the main reason the sol is where it is,” Diaz said in a phone interview from Lima. “Their strategy of being unpredictable is creating a bit of volatility in the market.”

The sol has fallen 1.8 percent this year after the central bank boosted efforts to stem appreciation as flows into South America’s fastest-growing economy rose. The currency advanced 5.7 percent in 2012.

The central bank held its target lending rate at 4.25 percent for a 22nd consecutive meeting yesterday. Any decision to cut borrowing costs will depend on the outlook for inflation, which may slow to 2 percent this month, the midpoint of policy makers’ target range, Adrian Armas, the bank’s research director, told reporters on a conference call today.

The yield on Peru’s benchmark 7.84 percent sol-denominated bond due in August 2020 climbed two basis points, or 0.02 percentage point, to 3.80 percent at 2:55 p.m. in Lima, according to data compiled by Bloomberg.

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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