Uruguay Central Bank Boosts Dollar Purchases to Stem Peso Rally

  • Peso gained 8.4% since June 30, best against dollar in world
  • Central bank has bought most dollars since 2013 to tame peso

Uruguay’s central bank quickened its pace of dollar purchases in a bid to stem the peso’s rally, the best in the world since the end of June.

The peso rose 0.1 percent to 28.024 per dollar at 4:24 p.m. in Montevideo, extending its gains since June 30 to 8.4 percent. The bank bought $42.5 million on Monday on the local spot market, following its purchase of $139 million last week, its biggest for a week since January 2013, to keep the currency from breaching 28 pesos per dollar.

“Even though all South American currencies have appreciated, Uruguay’s has come under even more pressure from foreign inflows seeking the carry trade,” Felipe Herran, senior trader at the Uruguayan unit of Buenos Aires-based Puente Hnos SA, said by phone. The bank is sending ”clear signals” through its sizable market interventions that the peso’s rally is coming to an end, he said.

The peso has surged since tumbling to a record low in March, thanks to tight monetary policy at home, a subdued outlook for U.S. rate increases, and expectations that Brazil, its second-biggest trading partner, is pulling out of a recession.

With inflation slowing to 8.9 percent last month from 11 percent in May, the bank lowered rates to 11.5 percent in Monday’s 28-day monetary regulation note auction. It was as high as 15.3 percent in March.

Policy makers have used a strong peso to fight inflation at the expense of competitiveness, said Herran. The bank will wait for Fed rate hikes to weaken the peso rather than reestablish capital controls it removed just last year, he said.

Before it's here, it's on the Bloomberg Terminal.