Chile joins currency war to help exporters
By Daniel Schweimler in Buenos Aires
Published: January 4 2011 17:54
Chile is set to become the latest country to join the “global currency wars” on Tuesday after the central bank said it would spend up to $12bn this year to curb the peso’s strength and so help exporters from one of Latin America’s most open and best managed economies.
The move, announced late on Monday after the peso rose to nearly a three-year high against the dollar, took markets by surprise as Chile’s central bank is known for its hands-off approach to its free-floating exchange rate.
The peso weakened by about 4 per cent on Tuesday as the news sunk in that the central bank would spend $50m a day from today selling pesos. Equivalent, in total, to 6 per cent of gross domestic product, the programme is the biggest intervention in Chile’s history and only its fourth since 1999.
Felipe Larraín, Chile’s finance minister, said: “We are supporting domestic producers, our exporters, in the farm as well as industrial sectors who depend on exchange rates. We think it is a well targeted step that is going to have an effect on the exchange rate.”
However, the central bank said the main reason for the move was to build up a cushion of international reserves equivalent to 17 per cent of GDP to protect Chile from possible repercussions from the eurozone’s sovereign debt crisis, continuing ultra-low international interest rates and the depreciation of the dollar.
“The availability of additional reserves will allow a better handling of any major deterioration of the global outlook,” it added.
Mexico is now the only big Latin American economy not seeking to weaken its currency via intervention, or by putting in place controls on capital inflows such as Brazil’s 6 per cent tax on bond inflows.Meanwhile, in emerging Europe, Turkey is considering cutting rates in an attempt to stem excessive capital inflows, a paradoxical move given it is also likely to be one of this year’s fastest-growing economies. Indeed, some analysts feared that the surprise move by Chile could open the way for further unorthodox policies in other emerging markets.
“If the pretty conservative Chilean central bank intervenes, what can you expect of the Brazilian central bank?” asked Pedro Tuesta, senior Latin America economist at researchers 4Cast Inc.
Others, however, played down the regional impact of Chile’s move.
“Chile is just the latest domino to fall into intervention,” said Tony Volpone, head of emerging markets research for the Americas at Nomura. “I don’t think it changes others’ attitudes as they are already intervening.”
Chile is expected to grow 6 per cent this year, boosted by exports of copper, which hit a record high of $9,754 a tonne on Tuesday, but analysts said its new intervention policy meant the central bank would probably pause when it next met on January 13 from raising interest rates again.
Chilean rates currently stand at 3.25 per cent, versus forecast inflation of about 3.3 per cent. But higher rates would only encourage capital inflows and further exchange rate appreciation.
Additional reporting by Reuters
Copyright The Financial Times Limited 2011.
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