Saturday, April 12, 2008

Reversal of Fortune

A couple months ago, UCLA economist Sebastián Edwards (a Chilean) recommended that the Chilean government take measures to reverse the peso's strength against the falling dollar. In the interim, though, the dollar continued falling, from nearly 500 to just above 430 pesos. The expensive peso has been threatening Chilean exports other than copper, for which demand and prices continue high; it's particularly affected the incoming travel and tourism sector, which earns dollars but has to pay salaries and other expenses in pesos.

As of Thursday, though, Chile's central bank announced its intention to increase its dollar reserves by purchasing US$8 billion between now and December; with the first purchase of US$50 million on Friday, the dollar rebounded to nearly 450 pesos. Manipulating the exchange rate through currency purchases is a tricky matter - especially for a relatively small economy such as Chile's - but if the trend continues the dollar could recover to Edwards's suggested equilibrium of 535 to 545 pesos. That would be just in time to make the country more affordable for the peak southern summer season.

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