Colombia’s peso weakened against the U.S. dollar on Monday as the government’s dollar-purchase plans squeezed investors, companies, and banks with foreign obligations, prompting them to sell the peso.
The peso shed 0.42 percent to 1,814 to the dollar, testing its weakest intraday and closing levels in a month.
Colombia’s decision to purchase $1.2 billion of dollars to pay debt coming due in January has “dramatically” increased the amount of dollars the government and central bank will buy on a daily basis, said Diego Donadio, Latin American foreign currency strategist at BNP Paribas in Sao Paulo.
“With the government buying so many dollars, getting them when you need them to pay debt or make a payment just got harder or more expensive,” he said. “This is forcing people to buy more dollars and causing the peso to weaken.”
To buy $1.2 billion by the end of 2011 to pay government debt as promised April 29 by Finance Minister and Central Bank Board Member Juan Carlos Echeverry, the government needs to buy an average of about $150 million per month.
Add this to the $20 million a day, or approximately $400 million a month the central bank is already buying and the government has committed to buy $550 million a month, or about half the $1 billion to $1.2 billion of monthly spot market turnover, he said.
“In a market like Colombia, that’s a huge amount,” he said. “If you have dollars you need, you had better make sure you get them or risk having to pay an even higher price.”
Colombia’s peso also weakened in the non-deliverable forwards, or NDF, market. The one month Colombian peso contract weakened 0.4 percent to 1,813.20 to the dollar.
The contract reflects peso-dollar exchange rate expectations for mid June.
The 1-year forward weakened 0.52 percent to 1,834 to the dollar. It reflects peso-dollar expectations for May 2012.
The peso is also weakening with world commodities prices and rising concern about a Greek debt default, said Clyde Wardle, chief emerging-market economist at HSBC in New York.