Perus central bank is considering a basket of
currencies to reduce the proportion of dollars in its
There is interest in diversifying reserves, to reduce
the profile of the dollar. This idea is similar to what the
Chinese have proposed: trying to find alternatives,
central bank president Julio Velarde told Emerging Markets.
Perus reserves are currently 80% in dollars and 20% in
euros, but is now considering moving 15% from dollars to a
basket of other currencies.
Perus net international reserves totalled $29.38
billion as of March 3, according to central bank data.
The central bank had divested of small quantities of
Canadian dollars and Japanese yen but may now buy these,
together with the currencies of Australia, Norway, and possibly
those of emerging market nations with investment-grade ratings,
such as Brazil and Mexico.
In the short term Velarde said the central bank will
continue aggressively lowering interest rates and intervening
in the currency market as long as the financial crisis lasts.
He said the banks board will definitely lower interest
rates when it meets on 8 April.
The board lowered rates by 25 basis points (bp) twice this
year, and Velarde said he expects a larger drop in the coming
I dont know what the rate will be, but we will
be more aggressive than the 25 points from the past two
months, he said.
He also said that the bank would probably continue
intervening in the exchange market to keep the nuevo sol from
moving too dramatically against the dollar.
The bank has sold $6.8 billion since the financial crash of
September last year. It did not intervene in March, but Velarde
said that this does not reflect a change in policy.
The banks currency stabilization operations totalled
$8.4 billion in 2008 and slightly more than $10 billion in
2007. The totals, however, were mainly in the purchase of
Peru intervenes more than other countries in the exchange
market because of its highly dollarized economy. About 50% of
bank deposits in Peru are in US dollars. It is just one of
handful of countries in South America, along with Paraguay and
Uruguay, that have partially dollarized systems. Ecuador, El
Salvador and Panama have dollarized economies.
We need to watch exchange rates more closely, because
nearly half of bank loans are in dollars, he said.
Peruvian authorities, including Velarde, say that prudent
management during the bonanza years this decade have provided
the country with a cushion. Peru has not had to turn to the
markets to finance its $3.4 billion stimulus package or finance
its debt. The late March $1 billion bond issue was for
provisions for 2010.
But Velarde said he expects a great deal of volatility this
year particularly of soft commodities such
as soy beans, wheat and corn that could create
additional pressures, particularly with inflation.
Velarde said volatility could lead countries, including
Peru, to miss inflation targets for the year. Perus
inflation target is 2%, which is the middle range for 2009.
Inflation in 2008 was 7%, low for the region but still more
than double the target.