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Colombia’s Peso Falls to Six-Week Low on U.S. Budget Cut Outlook

Nov. 21 (Bloomberg) -- Colombia’s peso dropped to a six-week low as U.S. lawmakers’ failure to agree on budget cuts and growing concern that Europe’s debt crisis will worsen reduced demand for higher-yielding, emerging-market assets.

The peso declined 0.7 percent to 1,928.2 per U.S. dollar, from 1,914.42 on Nov. 18. Earlier it touched 1,931.05, its weakest level since Oct. 10.

“There’s a generalized decline in the local market as investors reduce their exposure to risk,” said Daniel Escobar, an analyst at brokerage Global Securities in Bogota.

A debt-reduction committee with special powers that was supposed to dissolve congressional gridlock in Washington is instead on the brink of failure, setting the stage for $1.2 trillion in automatic spending cuts. Standard & Poor’s cut the U.S.’s rating to AA+ from AAA on Aug. 5, citing the nation’s political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce budget deficits.

Germany’s Finance Ministry said the country’s expansion has gotten “noticeably slower,” while Moody’s Investors Service said in a report today that rising financing costs are increasing France’s fiscal challenges.

Yields on Colombia’s shorter-term bonds are rising on speculation the central bank will raise the country’s overnight lending rate at its monetary policy meeting this week, according to Escobar.

Overnight Rate

The yield on Colombia’s 9.25 percent peso bonds due in August 2012 rose two basis points, or 0.02 percentage point, to 5.52 percent, according to the central bank. It has risen 20 basis points in the last month. The price fell 0.042 centavo today to 102.553 centavos per peso.

Banco de la Republica will raise the key rate a quarter percentage point to 4.75 percent on Nov. 25, according to 12 of 22 economists surveyed by Bloomberg. Ten analysts expect policy makers to leave the rate unchanged.

The central bank in October kept the rate at 4.5 percent for a third straight month, as it tries to gauge the impact of the European debt crisis on Colombia.

Still, minutes of the meeting highlight Colombia’s “very dynamic” internal demand, bank loans stabilizing at a “high” rate, and price indexes for new and old housing at a record high, which “may be explained in part by real interest rates still remaining at low levels.”

“The central bank needs to continue raising rates to prevent bubbles in the financial system,” said Escobar, who predicts Banco de la Republica will lift the key rate to 5 percent by year-end.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

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

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