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Colombia joins Japan, Brazil, and Peru in propping up dollar

Section: Daily Dispatches

Colombian Central Bank Buys Dollars, Peso Falls

By Jack Kimball and Nelson Bocanegra
Wednesday, September 15, 2010

BOGOTA, Colombia -- Colombia's central bank on Wednesday started purchasing what it said would be at least $20 million daily for the next four months to help ease the rise of its currency, becoming the latest Latin American economy to intervene in its market.

The move left the door open for more measures to curb the peso's appreciation and followed intervention by Brazil to ease the real's climb and Peru's buying dollars to curb the sol.

"The Board of Directors of the Central Bank decided to resume the accumulation of international reserves. To do this, it will purchase daily at least $20 million through competitive auctions for at least four months counting from (Wednesday)," the bank said in a statement on its website.

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The peso, one of the region's strongest performing currencies this year, fell 1.43 percent to a low of 1,817 pesos per dollar from Tuesday's close after the bank's announcement. The local unit closed down 0.89 percent at 1,807.1 on Wednesday.

The Colombian peso has soared 12.5 percent against the dollar this year, the sol has risen more than 3 percent and the real has rallied 4.5 percent since June. Brazil's currency weakened 1 percent on Wednesday after the government threatened to step up intervention.

Latin America's emerging market economies are struggling with appreciation. Regional powerhouse Brazil is aggressively buying dollars, Peru is tightening deposit requirements and Chile has warned it may also have to intervene.

Peru's central bank purchased $21 million on Wednesday, while on the other side of the world, Japan sold yen to battle an appreciating currency, which risks reducing demand for exports and damaging growth.

The peso's appreciation hurts Colombian exporters, who receive earnings in dollars but pay costs in pesos.

Colombia has seen foreign investment in oil and mining boom as its decades-long guerrilla conflict ebbs. The Andean country is now Latin America's No. 4 oil producer and an exporter of coal, coffee, flowers and nickel.

Analysts said the dollar purchases would help in the short term but could not rule out the central bank and the government taking more aggressive steps later in the year.

Wednesday's "intervention announcement was relatively mild, which shows the authorities are still shying away from more forceful FX market direct or indirect intervention measures," said Alberto Ramos of Goldman Sachs.

Traders said the bank bought $19.9 million at 1,805 pesos per dollar in its first auction on Wednesday after announcing the restart of dollar purchases.

Between March and June, the monetary authority bought $1.6 billion on the foreign exchange market, but stopped greenback purchases at the end of June.

"Surely this announcement will generate volatility and pressures for a rise in the dollar in the short term although it has been shown that this type of action cannot change the structural tendency," Daniel Velandia, manager of economic studies at the brokerage Correval, said in a note.

"However, the uncertainty about the amount of the intervention will prevent an important fall of the dollar in the coming days and we continue thinking that if the dollar restarts its falling tendency strongly in the near future, there will be additional measures."

Colombia's trade minister, Sergio Diaz Granados, said late on Tuesday that after the government pushes through its fiscal plans, the central bank would have room to purchase as much as $9 billion.

The central bank has other options available to stem the peso's rise, including capital controls on short-term portfolio investment, though such measures would not be favored by investors eyeing a return to investment grade for Colombia.

"History shows that this may be successful in preventing the currency from appreciating further," Capital Economics said in a report. "But it is unlikely to weaken it substantially -- something the authorities are hoping to achieve."

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