June 20 (Bloomberg) -- Colombian Finance Minister Mauricio Cardenas signaled the government may wind down its currency intervention after the peso weakened to an 18-month low.
“We don’t have a target for the exchange rate,” Cardenas said in Bogota, adding that the peso was overvalued when at 1,750 to 1,800 per dollar, about 8 percent weaker than today. “We’re very satisfied to see how the exchange rate has reacted, so we can say on this issue we already have done our job.”
The currency had its biggest daily drop since 2010 today, weakening 2.2 percent to 1939.2 per dollar, after the Federal Reserve said yesterday it may start scaling back an asset purchase program that has kept U.S. yields low and buoyed emerging market assets.
The central bank’s policy committee, which Cardenas chairs, voted unanimously on May 31 to extend its program of daily dollar purchases until September. The government is also changing the rules governing pension funds to encourage them to invest more abroad, and also urged state-owned oil company Ecopetrol SA to curb its borrowing in foreign currency.
Cardenas will be wary of encouraging the currency to weaken even further, which would risk stoking inflation, said Francisco Rodriguez, senior Andean economist at Bank of America Corp., in New York.
“On the one hand, he is claiming credit for having brought the peso to current levels, but he is also opening the door for winding down intervention if the currency remains in the current range,” Rodriguez said in an e-mailed response to questions. “According to his reasoning, the over-valuation has been corrected and there is no further rationale for intervention.”
Cardenas said in a May 23 interview the government needed to act to weaken the peso to its “equilibrium rate” of 1,950 per dollar.
The currency has fallen 8.9 percent this year, the biggest drop among major emerging market currencies tracked by Bloomberg after the South African rand and the Brazilian real.
“Banco de la Republica’s intervention in the local foreign exchange market as well as the measures adopted by the government have reinforced the tendency of the peso to depreciate,” policy makers said in the minutes to their May policy meeting.
Gross domestic product in the first quarter expanded 2.8 percent from the year earlier, the national statistics agency said today in Bogota, lower than the 3 percent growth forecast by Cardenas. The industrial sector, which according to Cardenas has suffered from an overvalued peso, contracted 4.1 percent from a year earlier.
Central bank co-director Adolfo Meisel said April 10 that foreign currency intervention can help accelerate the convergence of a currency to its “equilibrium rate” without altering its long-term trend.
Cardenas “knows that it will be very hard to get the central bank board to agree to continue to intervene to get the peso to depreciate further than its equilibrium level,” Rodriguez said. “In the central bank’s rationale, you intervene in order to correct an exchange rate misalignment but not to try to alter the long-run value of the exchange rate.”
To contact the editor responsible for this story: Andre Soliani at firstname.lastname@example.org