Chile Peso Falls to Six-Week Low on U.S. Budget, China Policy

Chile’s peso dropped to a six-week low as China tightened monetary policy, U.S. budget cuts started to take effect and political gridlock in Italy remained, diminishing global economic prospects.

The peso dropped less than 0.1 percent to 474.33 per U.S. dollar at the close in Santiago, the weakest since Jan. 16. The currency earlier slid to as low as 475.34.

“It should be weakening further,” said Alejandro Araya, a currency trader at Banco Santander Chile in Santiago. “With the U.S. sequester, the unresolved situation in Italy and Chinese data, the peso should be trading weaker than 475.”

Thirty-day volatility in the Chilean peso fell to its lowest level in almost 15 years. The currency has traded in a range of 475 to 470 per dollar from Jan. 16 through today on a closing basis.

Concern that Chile’s central bank may intervene to slow the currency’s appreciation is offsetting a steady target lending rate of 5 percent and stronger-than-average growth.

The nation’s economy expanded 6.5 percent in January from a year earlier, according to the median forecast of 14 economists surveyed by Bloomberg before tomorrow’s report from the central bank. The average growth rate over the past five years is 4 percent.

Traders in the forwards market for unidades de fomento, Chile’s index-linked accounting unit, projected 1.54 percent annual inflation in February and 1.73 percent this month. Chile has the slowest inflation among seven Latin American economies tracked by Bloomberg.

The peso weakened today as China’s government ordered measures to cool property prices by making home loans more expensive to finance and U.S. spending cuts began to trickle through the federal government, curbing growth expectations for the world’s two biggest consumers of copper, Chile’s main export. Italian politicians were still at loggerheads after an inconclusive election result.

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