MercoPress. South Atlantic News Agency

Chile’s growing concern with soaring Peso and plummeting dollar in local market

Finance minister Larrain feels ‘calmer’ after copper prices fall

Chilean authorities are feeling “calmer” with the exchange rate nearing 480 pesos per US dollar, Finance Minister Felipe Larrain said on Tuesday, as the currency retreated from the year-and-a-half highs it reached earlier this month.

The soaring Peso has created havoc among Chilean exporters not linked to the copper industry, such as fisheries, forestry, fresh produce and wine, bitterly complaining that the ‘Chilean cost’ in Pesos turns them uncompetitive.

The Peso in early April had climbed to levels that had triggered a central bank currency intervention in early 2011 to stem its strength, but has since given up those gains in large part as prices for country's top export copper have tumbled.

“Undoubtedly, lower copper prices bring with them a weaker peso ... We're a little ”calmer“ with an exchange rate that today is near 480 Pesos,” Larrain told reporters.

The Chilean Peso typically moves in line with copper prices, as higher prices mean more dollars entering the local market due to sales of the red metal. The inverse is true of lower prices.

Copper fell to a fresh 18 month low on Tuesday as disappointing economic data from top metals consumer China reinforced concerns over prospects for demand.

Chilean authorities had expressed concern about the Peso earlier this month, after it breached 465.50 per US dollar, its 2011 currency intervention levels.

In recent weeks, the bank has said a currency market intervention is one of the tools at its disposal, but it has also highlighted the costs associated with such a move.

Chile which has seen a massive inflow of dollars with the trade surplus motivated by China’s avidity for cooper, has also received foreign investments interested in taking advantage of one of the best managed economies of the region.

Brazil another magnet for foreign investors has also suffered the impact of the so-called ‘dollar-tsunami’ making its currency the Real particularly strong against the US dollar.

Faced with this situation Brazil has implemented a batch of measures to counter the massive influx of foreign capital, contrary to orthodox Chile, which rejects point blank any controls or other mechanisms to contain the impacts. The Chilean government is required by law to run a fiscal surplus of at least 1% of GDP.