MercoPress. South Atlantic News Agency

Chile intervenes foreign exchange mart to weaken Peso

Chile's central bank, under pressure from Congress and exporters to weaken the peso, announced Thursday it will buy 8 billion US dollars in currency markets this year to increase reserves and in response to the sharp appreciation against the dollar.

"The central bank's council decided today to intervene in the foreign exchange market to strengthen the international liquidity position of the Chilean economy'' the bank said in a statement on its web site. Senators including former President Eduardo Frei and opposition leader Hernan Larrain earlier in the month urged Central bank president Jose De Gregorio to weaken the currency, which has gained 15% against the US dollar this year, seriously impairing non copper exports. "The complex scenario that financial markets in developed economies are going through, triggered by the crisis in the United States' real estate market, has increased the risk of severe disruptions that could negatively impact the external financial conditions faced by the Chilean economy," the bank said in a statement. "The depth and consequences of an international financial crisis remain highly uncertain," it added. "With these concerns in mind, the Board of the Central Bank of Chile today decided to intervene in the foreign exchange market so as to strengthen the external liquidity position of the Chilean economy." The US dollar this week fell to 434 Chilean pesos, its lowest level in more than a decade, as comparatively higher interest rates make the currency more attractive and booming copper prices maintain strong trade surpluses. Increasing reserves will allow Chile "to better face the possibility of further severe, abrupt deterioration in international conditions" added the release. For the first four weeks, starting April 14, the bank will buy 50 million US dollars a day through competitive auctions. Dollar purchases will continue until December 12. The Central bank had 17 billion US dollars of reserves at the end of last year, of which 10.5 billion was invested in dollars and 6 billion in Euros. The bank has added another one billion to its reserves in the last three months. Chile's consumer price index rose 0.8% in March with annual inflation in a 14 year high of 8.5% from 8.1% the prior month. Chile's Central bank has raised its benchmark rate five times since July in a bid to control surging inflation, while the US Federal Reserve has slashed its key rate to 2.25% to stave off recession The Chilean Central bank held the target overnight lending rate at 6.25% for a third month in a row at its monthly monetary policy meeting on Thursday, in a decision widely expected by the local market. The bank said its plan was also in keeping with its conduct of monetary policy, which aims to keep inflation at 3%, within a range of one percentage point either way.