Peruvian Sol Hits Record Low as Demand for Copper Slows

Peru’s currency has fallen in value, with  the U.S. dollar now worth over three soles, as the Andean country struggles to narrow the trade deficit amid decreasing demand for …

Peru’s currency has fallen in value, with  the U.S. dollar now worth over three soles, as the Andean country struggles to narrow the trade deficit amid decreasing demand for its copper in the global marketplace.

Slowing domestic consumption and restrictions on gold exports also seem to have taken a toll on the country’s currency. The last time the Peruvian currency was above 3 soles per dollar was in June 2009.

Last week, Peru imposed limits on currency derivative trade in an attempt to keep speculators at bay and curb volatility in the currency market. Yet the Sol has continued to slide, with the Andean country having posted a trade deficit for nine straight months.

Peru recently sold a large sum of U.S. dollars in the spot market to halt the rise of the dollar against its currency. Then its central bank lowered cash reserve requirements for deposits in local currency while increasing those for dollar deposits. Neither measure seems to have proved effective in protecting the currency.

For years, high dollarization levels have been a structural feature of Peruvian banks. According to a press release from Fitch Ratings last month, Peru’s dollarization has trended lower over the past decade and a half, dropping to 45% of loans as of the third quarter of 2014, down from 83% at year-end 2000.

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In major emerging countries, dropping crude oil prices have helped governments to cut bank interest rates and stimulate economic activity. But Peru’s heavy reliance on copper mines leaves it with little room to use such maneuvers.

Slower growth in China and Europe is damping demand for copper, which accounts for almost a quarter of the country’s exports. After dropping 17% in 2014, copper has lost a further 7.2% in exports so far this year.

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