Colombian Peso Leads Global Declines on Fed Rate Vulnerability

  • Country seen as among most at risk from higher U.S. rates
  • Oil's decline also adding to bearish sentiment on peso

Colombia’s peso dropped the most in eleven weeks as Federal Reserve officials reinforced the view that interest rates will rise this year, hurting appetite for higher yielding assets.

Colombia is among the countries most vulnerable to rising U.S. rates because higher borrowing costs will make it more difficult for the nation to fund its current account deficit, which is running at the highest in more than three decades, according to Jimena Zuniga, an economist at Bloomberg Intelligence. The peso plunged 3.1 percent to 3,036.84 per dollar at the close. in Bogota, its biggest drop since Aug. 24. This year, the peso has tumbled 22 percent, second only to the Brazilian real among major currencies.

Fed Bank of New York President William C. Dudley said Thursday conditions for raising rates may soon be satisfied while Fed Bank of St. Louis President James Bullard earlier said that the U.S. central bank should raise interest rates from near zero because emergency policies are not needed with the labor market and inflation near to the central bank’s goals. Futures traders assign a two-thirds probability to a Fed liftoff in December. Declines in oil, which traded the lowest in more than two months, are also helping push the Colombian peso lower, according to Sebastian Diaz, an analyst at Banco de Bogota.

"Investors are betting on a Fed liftoff next month and added to that you have a drop in oil," Diaz said.

In Colombia, central bank co-director Cesar Vallejo said in a interview Wednesday that inflation expectations are lower now than they were a month ago, helped by last month’s bigger-than-forecast interest rate increase. His comments contrasted those of co-director Carlos Gustavo Cano, who said in a presentation the same day that medium-term inflation expectations are becoming unanchored and that policy makers have to act in a “forceful and sufficient” manner so as to not put the central bank’s credibility at risk.

Banco de la Republica last month increased its benchmark policy rate by the most in more than a decade to curb the fastest consumer price increases since 2009. Inflation continues to surprise on the upside, which will lead Banco de la Republica to raise the lending rate another half percentage point to 5.75 percent this month, according to Diaz.

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