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Colombian Peso Jumps Most in Four Months on Fed Bond Purchases

Colombia’s peso rose the most in four months as the Federal Reserve’s plan to pump more money into the world’s biggest economy fueled demand for higher-yielding, emerging-market assets.

The Fed said yesterday it will buy an additional $600 billion of Treasuries through June as part of its record stimulus to reduce unemployment and avert deflation. The debt buying is known as quantitative easing because it aims to increase the quantity of money. Yesterday’s action has been dubbed “QE2” by analysts and investors because it’s the second round of quantitative easing.

The Colombian peso climbed 1 percent to 1,818.15 per U.S. dollar at 2:51 p.m. New York time, from 1,836.95 yesterday. It was the biggest jump since July 8. Today’s gain pushed the peso up 12.4 percent this year, the third-best performance after the Iceland krona and Thai baht among 25 emerging-market currencies tracked by Bloomberg.

“The trend for inflows to continue pressuring gains in Latin American currencies will remain because of QE2,” said Enrique Alvarez, head of Latin America fixed-income research at IDEAglobal in New York. “Investors are seeking growth and yield.”

Measures announced last week by Colombian officials to ease the peso’s rally will help temper some of the local currency’s gains, according to Alvarez.

Finance Minister Juan Carlos Echeverry said Oct. 29 the government will eliminate most tax exemptions on overseas borrowing and keep $1.5 billion abroad “at least for the first months of 2011” to reduce the inflow of dollars. The government will also buy as much as $3.7 billion through the currency forwards market to hedge foreign debt payments, he said.

Ecopetrol Dollar Sales

The same day, central bank chief Jose Dario Uribe said the institution will keep buying a minimum of $20 million a day through auctions until at least March 15, two months longer than previously planned. He also left open the possibility of additional purchases, saying the bank can buy dollars in the market through a local clearing house “at any time.”

“Colombian markets are just digesting the new set of measures,” said Alvarez. He forecasts the peso will end this year at 1,830 per dollar.

State oil company Ecopetrol SA will avoid bringing in about $2.5 billion from abroad in a bid to ease the local currency’s rally, Chief Executive Officer Javier Gutierrez said in an interview with La Republica newspaper.

Besides the $1.4 billion in dividends the company will pay the government in an overseas account, Ecopetrol is paying contractors and providers in dollars and will sell bonds locally instead of abroad, he said, according to the Bogota-based daily.

So far this year, Ecopetrol has sold about $2.9 billion in the local currency market, Gutierrez said, according to the daily.

The yield on the nation’s benchmark 11 percent bonds due 2020 fell 8 basis points, or 0.08 percentage point, to 7.02 percent, according to Colombia’s stock exchange. The bond’s price rose 0.604 centavo to 127.276 centavos per peso.

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