Nearshore Americas

Peru’s Currency Rises Spikes as Dependence on Dollar Shows Vulnerability

Peru’s currency the “Sol” has continued to rise against the US dollar, further undermining the competitiveness of the Latin American nation in the global marketplace.

Last week, the sol appreciated 0.2 percent to 2.5820 per U.S. dollar. That is the currency’s strongest close since 1996.

Reuters says the Sol will extend its rise in the days ahead because of increasing foreign investment in Peru’s mining industry and the United States’ decision to inject more money into the economy.

Many countries across Latin America are seeing their currency rising against the US dollar, but ‘Peru’s central bank has a more difficult job than most of its peers’, says Reuters.

The central bank has already bought a record $11.6-billion this year in an attempt to push the currency downwards. Now Peru has limited tools to avert sharp currency swings in the partially dollarized economy.

But Peru appears to be buying more dollars in an attempt to boost demand for US currency.

According to Reuters, chief of the Peru’s central bank says the ‘sol might retreat only several years from now’.

More than 40 per cent of all bank deposits in Peru are denominated in dollars and loans denominated in dollars are widely available.

Peru’s economy has been growing relentlessly for the past three years. Now, analysts say, the currency appreciation might halt the growth.

“Our primary worry is vulnerability from loans in dollars. We don’t want the sol to appreciate beyond what fundamentals merit because at some point it will retreat,” Central Bank president Julio Velarde told Congress on Wednesday. “This could happen in three, four or five years. We are concerned about what could happen with the financial system when it does retreat … so it’s better to try to prevent (excessive strengthening).”

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