Peru’s sol has gained over 5% against the dollar this month to reverse all its losses in 2016.
The sol traded at a 3.520 per dollar on March 2 when the rally began. The sol traded for 3.327 in early trading this morning for a cumulative loss of 5% in just two weeks and below the 3.414 price for a dollar on Jan. 1.
This month’s rally reversed a trend which saw the sol fall as much as 19% in the year before March 2. Friday saw the sol rise 2.1% in the greatest gain in a single day’s trading in seven years.
“What happened it is that emerging-market currencies were over-punished for excessive fears about a world recession, which have calmed,” central bank president Julio Velarde told El Comercio. “As the perceived risk of emerging markets had already diminished weeks ago, the reduction of interest rates by the European Central Bank and increased lending of between $67 billion to $89 billion will allow more money to return to emerging markets.”
In addition to quantitative easing in Europe, analysts also attribute the sol’s recovery to expectations that China, the world’s biggest buyer of copper and other metals produced in Peru, will announce measures to bolster its slowing economy. The news from Europe and China bolstered commodity prices from copper to oil, prompting a gain for most emerging-market currencies.
4Cast Inc. economist Pedro Tuesta told Bloomberg that traders who had shorted the currency during its yearlong decline were forced to buy soles to stem their losses, which further accelerated the selling of dollars. Bloomberg also reports that the central bank has spoken with banks about buying dollars to slow the rise of the sol, which would mark a reverse in its interventions to slow the fall of the sol since October.
However it is unclear whether the sol’s rally will continue. Yesterday saw the dollar gain 0.69% on the sol for the sharpest increase in a year of gains. Finance minister Alonso Segura went on Radio Nacional last Friday to compel listeners to continue converting their dollar-denominated debts to soles.
“The logical move is to take advantage of this breather, which we do not know whether or not will be permanent or temporary, to line up your revenues and debts in the same currencies. Take this opportunity to avoid further unbalances,” Segura said. “[Strength in the United States economy] could cause the exchange rate to rise and [dollar-denominated] debt would increase. It’s the same for businesses although on a different scale.”
Segura highlighted pressure on the dollar could evaporate with an increase in the key rate from the U.S. Federal Reserve, which announced today that it would hold interest rates steady this month but will continue to tighten policy in the coming months.
The sol traded for 3.381 per dollar this morning just ahead of the U.S. central bank’s announcement.