Chile to Buy U.S. Dollars to Weaken Peso

The Central Bank of Chile will be buying the U.S. dollars in 2008 in order to stimulate the economy by the weaker national currency.

This year, starting April 14 Chile’s central bank will be buying $50 million every day on the Forex market to increase the overal country’s currency reserves from current $18 billion to $26 billion.

This step is rather controversial as the weakening of the peso will spur the consumer prices, while the inflation in Chile is already at a highest high level since 1996. CPI was at 8.4% in March (year-to-year) with the central bank’s target value between 2% and 4%.

On the other hand, weaker peso will bust the competitiveness of the exporting companies, increasing the economy output growth. Chile is a very export-orientated country with a large part of copper in the national export. Copper is sold for U.S. dollars and, with a cheaper peso, costs of production will remain low.

Although, the dollar purchasing process probably won’t affect the U.S. dollar rate against the other currencies, as it will be performed rather slowly, without sharp interventions, it may create some additional demand that will keep dollar from the fast falls during the volatile sessions.

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