The Colombian peso retreated Monday against the dollar for the first time in four sessions as a renewed wave of fears over Europe’s debt crisis spurred investors to shed riskier emerging-market currencies.
The peso, which rallied last week against the greenback and crept closer to a three-year high, gave back some of those gains and traded at COP1,770 to the dollar, weaker than Friday’s close at COP1,760.45. The peso has appreciated 7% so far this year.
Fresh fears that the euro-zone debt crisis focused on Greece could soon ensnare larger economies such as Italy and Spain, spawned a selloff in riskier assets, including some emerging-market currencies like the peso.
“Right now the exchange rate is moving based on international factors,” said David Aldana, an economist with Bogota-based brokerage firm Ultrabursatiles SA.
The peso is poised to continue losing ground in the coming weeks as mounting speculation that the government is set to take new measures to limit its strength is likely to intensify ahead of the central bank’s monetary policy meeting slated for July 29.
President Juan Manuel Santos warned in an interview last week that if the central bank continues increasing interest rates, Colombia could attract more foreign investment which could lead to an even stronger currency.
“We are now the darling of investors and if the interest rate goes up they will come with even more enthusiasm, which could be counterproductive,” Santos said.
Santos suggested that drastic measures to curb the peso’s strength, such as capital controls that limit then entry of foreign investment, are not likely. Yet the government still has used other weapons to try to halt the peso’s surge.
The government has attempted to rein in the peso without resorting to capital controls, instead by using a mix of measures that included buying dollars in the spot market and keeping dollar dividends from state-run oil firm Ecopetrol SA abroad at least until next year. Some of the country’s largest business federations, however, have lobbied this year for the use of capital controls.
The government, though, seems to be giving priority to foreign direct investment, which is geared mostly at Colombia’s booming oil and mining industries. Santos has set an ambitious goal of $14 billion in foreign investment this year, a figure that would mark a record for the country.
One possibility, Aldana said, could be imposing restrictions on Colombian companies borrowing dollars abroad. Short-term dollar borrowing by Colombian companies has surged in recent months, generating an influx of dollars into the country. Limiting those loans could have a direct impact in easing the peso’s strength.
Another option would for the central bank to increase its dollar purchases above the $20 million it has been buying daily. “There are plenty of measures the government can take that don’t involve capital controls,” Aldana said.