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Colombia Central Bank Says Market Misreading Dollar Buying

Investors are misreading Colombia’s dollar purchases, which are intended to build reserves rather than weaken the peso, central bank Governor Jose Dario Uribe said.

“Our intervention in the foreign exchange market has as its objective the accumulation of a higher level of international reserves,” Uribe said today in an interview at the central bank in Bogota. “It was never its goal to seek or defend a level of the nominal or real exchange rate.”

Colombia’s is the only major central bank in Latin America that has continued to buy dollars during this year’s selloff of emerging market assets. The peso weakened the most among 24 major developing nation currencies this week, after Uribe said Jan. 31 that the recent decline is “something we view as positive.”

Investors who are selling pesos in the belief that the central bank is targeting a weaker peso are “totally mistaken”, Uribe said.

Brazil, South Africa and Turkey raised interest rates last month, while countries such as Peru sold dollars to prevent their currencies from losing value. Emerging market assets plunged after the U.S. Federal Reserve began trimming monthly bond purchases as it phases out record levels of stimulus. Signs that China’s economy is slowing also contributed to the selloff.

“The peso’s devaluation in the past year is mainly the result of changes in external variables and in no way compromises achieving the inflation target,” Uribe said. “We have less fear of floating than other central banks. We’ve learned that floating is the best exchange rate system for a country like Colombia today.”

Biggest Drop

The peso weakened 0.2 percent to 2,047.54 pesos per dollar today, taking its drop since the start of the year to 5.8 percent, the biggest decline after Argentina of 171 currencies tracked by Bloomberg.

Colombia’s international reserves ended last year at $43.6 billion, compared with $65.7 billion in Peru, $176.6 billion in Mexico and $41.1 billion in Chile.

While Colombian reserves represent almost 10 months of imports, in Chile it is just over six months and in Peru it is more than 18 months.

At its December board meeting, Colombia’s central bank pledged to buy as much as $1 billion in the first three months of the year, on top of a record $6.8 billion last year. The bank has bought an average of $10 million per day since the start of the year.

Banco de la Republica reviewed its estimates for how fast the economy can grow without stoking inflation and concluded that potential growth rate is little changed from what they calculated three or six months ago, Uribe said.

In the minutes to the bank’s December meeting, policy makers said that persistent low inflation may be a sign that they had underestimated potential GDP growth.

“The fact that the inflation rate fell below target in the second half of last year is the result fundamentally of supply factors, positive shocks in food and regulated prices,” Uribe said. “In no way is it a weakening in demand and a widening of the output gap.”

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