The Colombian peso on Wednesday reached a three-week high against the US dollar as a new tax cut is expected to entice foreign investors to buy up Colombian debt.
According to Bloomberg News, foreign companies are also likely to exchange US dollars for pesos in order to pay taxes.
The peso on Wednesday rose 0.5 percent to 1,765.66 per USD, considered the biggest jump since December 31.
The Colombian government on January 1 cut taxes on foreign investors’ earnings from local securities to 14% down from 33%, leading speculators to believe foreign investment in the Colombian market would rise.
“The trend for the first half of the year is for a stronger peso,” Felipe Campos, the head analyst at Alianza Valores brokerage, said to Bloomberg.
“You have companies bringing in dollars to pay taxes in February, and we’ll also see more and more foreigners coming into the local debt market,” said Campos.
Colombia’s finance minister, Mauricio Cardenas, on Tuesday said that the government was “studying formulas, options” to curb the peso rally.
“The government is aware that this is a problem. It’s a reflection of the economy’s strength,” said the finance minister.
Cardenas also announced that the government would use “all its ammunition” to stem further gains, but ruled out capital controls “at this moment,” citing their inefficiency. Instead, Cardenas suggested the central bank should step up dollar purchases.
Colombia purchased a record $4.8 billion worth of US dollars last year.
According to the Financial Times, Colombia received some $16 billion in foreign investment flows in 2012, pushing the peso up 9% against the dollar during the year.
The strong Colombian peso has hit the country’s manufacturing and non-commodity export sectors especially hard, which has led to demands of measures to weaken the currency.