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Chile’s peso rallied as the central bank offered to sell as much as a quarter of its entire dollar reserves to stabilize a currency that had fallen to record lows in each of the two previous trading sessions.
The peso closed at 809.46 per dollar in Santiago, up 2.3%, after strengthening to as much as 797.39 per dollar earlier in the day.
The central bank will sell $200 million a day on the spot market next week, the first stage of an intervention policy that could reach $10 billion, bank President Mario Marcel said. It will also offer $200 million in the forwards market each day. It is the first direct intervention in the market since 2011 and follows two weeks of large price swings.
“The objective of this measure is to reduce an excessive level of volatility in the market which has been expressed through an overreaction to news,” Marcel told reporters Friday. “More than the level of the peso itself, we think volatility itself has gone beyond fundamentals.”
The peso has tumbled 10.3% in a month as the worst social unrest in decades forces shops to close, paralyzes much of the public transport system and leads many people to cut short their working hours. The government, which has agreed to write up a new constitution to placate the protesters, has estimated the damage to state property alone at $1 billion. In the meantime, the looting continues.
The intervention “looks promising, but I think we need to follow what happens in regards to the change in the constitution and so on before we say that the sell-off is over,” said Lisa Synning, a Stockholm-based money manager at Handelsbanken Fonder AB.
Six weeks of demonstrations and looting is now threatening to stall economic growth. Manufacturing tumbled 5.8% in October from the year earlier, even though the troubles didn’t start until Oct. 18.
The central bank has $39.7 billion in foreign currency reserves to finance the dollar sales. Those reserves have been little changed for the past seven years.
To provide more information to the market, the central bank has brought forward its next rate decision by two days to Dec. 4. The quarterly monetary report, which includes estimates for growth and investment, will be on Dec. 5 as opposed to Dec. 9.
Marcel said today that monetary policy was already “significantly” expansive and that interest rates must take into account the exchange rate policy and changes to fiscal policy.
The government has announced spending increases to help quell the protests, including a new minimum income and an increase in the basic pension.
(Updates with comments from central bank president starting in the third paragraph.)
--With assistance from Eduardo Thomson.
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