Peru to Make Record Dollar Purchases to Stem Cash `Avalanche,’ Segura Says

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By John Quigley
Bloomberg.com

Peru’s central bank may buy a record amount of dollars in the foreign-exchange market this year in a bid to prevent an “avalanche” of investment from spurring gains in the sol, according to Banco de Credito, the country’s biggest bank.

Purchases may surpass the $10.3 billion the central bank bought in 2007, after a surge in short-term investment drove the sol to a 23-month high this month, said Alonso Segura, head of research at Banco de Credito, in an interview in Lima yesterday. The bank has bought $4.6 billion this year, including $1.4 billion this month.

Foreign investors are moving capital into the country as policy makers lift borrowing costs to prevent the $129 billion economy from overheating. The central bank will probably raise reserve requirements again, following an increase on July 18, Segura said. The Finance Ministry said this week it will coordinate dollar purchases with the central bank to slow gains in the currency.

“They’re throwing everything they’ve got to discourage investors before it becomes an avalanche,” Segura said. “The bank is constantly inventing new ways of controlling the exchange rate while keeping inflation where they want it,” said Segura.

The bank may also raise the limit on how much Peru’s private pension funds can invest overseas to 30 percent of their assets, from 28 percent now, to relieve pressure on the currency, Segura said.

The sol rose 0.1 percent to 2.8210 per U.S. dollar at 10:56 a.m. New York time, from 2.8250 yesterday.

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