Price of the dollar in Peru on the decline: Factors that keep it in the 3 soles

On April 1, the dollar closed at S/ 3.635, being its lowest level since mid-May last year, according to Bloomberg. In this way, the foreign currency has accumulated a 3.9% decrease compared to the end of 2021, considering that it closed the year at S/3,989 soles.

In order for the US dollar to remain lower so far this year, these are the factors involved:

FIRST FACTOR

According to experts, compared to what happens in the region, Peru has had a greater intention of foreign investors to position itself in Peruvian assets. Although this momentum is not new, the war between Russia and Ukraine has given it a new impetus.

“Eastern European markets have been affected and there is a new kind of substitution towards markets further away from the conflict. This is linked to the increased uncertainty due to the war in Russia and the improvement in commodity prices,” explained Mario Guerrero, Assistant Manager of Economics at Scotiabank's Department of Economic Studies to Management.

“In the midst of all these negative effects, Latin America has been favored, as the rise in prices of grains, oil and metals (gold, copper and zinc), makes countries like Argentina, Brazil, Colombia, Chile and Peru more attractive,” he continued.

SECOND FACTOR

In turn, Guerrero said that the Central Reserve Bank of Peru has begun a period of increasing the benchmark rate to anchor inflation expectations. “There is a differential factor in interest rates favorable to Latin American countries compared to the United States, and that attracts capital to the region and, in particular, to Peru,” he said.

THIRD FACTOR

There is now less concern on the part of investors that a radical policy will be implemented in nations. In other words, political noise no longer produces significant pressure to increase the exchange rate, and it is made more in line with the macroeconomic and fiscal reality of the Peruvian economy.

“This is because the market understands that there is no political capital for the proposed measures to be finally carried out. Last year, the first three quarters saw an unprecedented outflow of capital and pushed the exchange rate upwards, causing the sun to separate from its fundamentals. Despite the political noise, the exchange rate is now responding to the soundness of public finances and macroeconomic fundamentals,” Guerrero told the media.

“The increases above 4 soles seen last year were an exceptional situation due to the increased sensitivity to political noise. Today this sensitivity has been dissipating,” he continued.

SOL PERUANO

The sun has been the legal tender in Peru since 1991 and replaced the inti, which circulated between 1985 and 1991. At first it was also called “nuevo sol” to differentiate it from its predecessor, but by 2015 it is called only the sun.

The emergence of the new sun is understood after the world crisis of 1929, which led to a deep economic and exchange rate crisis in the country, as well as the creation of the Central Reserve Bank of Peru. It was during the first year of Alberto Fujimori's government that the new sun was promoted to balance hyperinflation and reorder the economy.

After it entered into force, one sol was equivalent to one million intis or one billion “old” soles; currently the currency is divided into 100 cents and its issuance is regulated by the Central Reserve Bank of Peru.

Currently, coins of 10, 20, 50 cents, 1, 2 and 5 soles and banknotes of 10, 20, 50, 100 and 200 soles are circulating. Before, 1-cent coins were also minted, but these were withdrawn from circulation in May 2011, while in January 2019 the 5-cent coins came out of circulation.

On the other hand, the exchange rate parity with respect to the dollar and the euro is fixed daily by the agency in charge. It should be noted that since 2014 the Peruvian currency has been in depreciation.

On the economic side, the World Bank (WB) has predicted that by 2022 Peru will have growth of only 3.2% after it had a 13% rebound in 2021. Likewise, by 2023 it would slow down to grow by only 3 percent.

However, experts have assured that Peru could experience a deterioration in business confidence in the face of the uncertainty that exists in the policy and fiscal rules that are intended to be carried out.

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