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Peru Sol Falls to One-Week Low as Central Bank Purchases Dollars

March 18 (Bloomberg) -- Peru’s sol fell to the lowest level in a week after the central bank bought dollars to stem appreciation as companies paid income tax in the local currency.

The sol depreciated 0.1 percent to 2.5960 per U.S. dollar at the close of trading in Lima, according to prices from Datatec. It has fallen 1.7 percent this year after a 5.4 percent gain in 2012.

Banco Central de Reserva del Peru said on its website that it bought $20 million today and $3.8 billion this year. The sol had initially showed “resilience” amid a sell-off in emerging-market assets as European finance ministers forced depositors in Cypriot banks to share in the cost of a bailout, said Gonzalo Navarro, head trader at Banco Santander Peru SA.

“It was the purchases by the central bank, when the market had barely traded $10 million, that caused the market to react” and led the sol to decline, Navarro said in an e-mailed response to questions.

The monetary authority stepped up its purchases since the start of the year and increased dollar reserve requirements three times on concern that the sol was appreciating beyond its fundamental value, central bank President Julio Velarde said in a March 16 interview in Panama City.

The bank has reduced the frequency of its interventions after buying dollars every day from Sept. 7 to Feb. 19.

“We’re not predictable,” Velarde said. “There’ve been times when we’ve left the market completely dry.”

Peru will capitalize the central bank to give it more leeway to intervene in the foreign exchange market, Finance Minister Miguel Castilla said yesterday.

The yield on Peru’s benchmark 7.84 percent sol bond due August 2020 fell two basis points, or 0.02 percentage point, to 3.77 percent, according to data compiled by Bloomberg. The price rose 0.14 centimo to 125.95 centimos per sol.

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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