Reuters: US Dollar Report: UPDATE 1-Exiting Colombia finance minister in final bid to stem peso gain

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UPDATE 1-Exiting Colombia finance minister in final bid to stem peso gain Aug 24th 2012, 15:29 Fri Aug 24, 2012 11:29am EDT * Finance minister attends his final central bank meeting on Friday * Central bank expected to cut interest rate again * Peso is one of world's strongest gaining currencies By Helen Murphy BOGOTA, Aug 24 (Reuters) - Colombia's outgoing Finance Minister Juan Carlos Echeverry will "once again try to persuade" central bank policymakers at his final board meeting on Friday to be more aggressive in its handling of the currency and ease gains in the peso. Echeverry, who resigned this week and will be replaced by current Energy Minister Mauricio Cardenas, has been increasingly vocal in recent weeks that the bank should play a bigger role in stemming the peso, one of the world's top gaining currencies. Echeverry will vote for a last time at the seven-member board meeting on Friday. A Reuters survey of 35 economists shows most expect the bank to cut the benchmark lending rate a quarter point to 4.75 percent to help stimulate a slowing economy. "Colombia is confronting a world currency war and those that don't participate in the war, lose," Echeverry said late Thursday after President Juan Manuel Santos announced the first of a series of changes to his cabinet. Echeverry wants the bank to use pesos to step up daily intervention in the foreign exchange market to $40 million, up from at least $20 billion currently. "We have inflation near 3 percent and that gives us a lot of tranquility ... while there's no challenge with inflation the bank can intervene more." At the last central bank policy meeting, which cut the benchmark interest rate by 25 basis points to 4.75 percent, Echeverry said he called for a steeper cut to bolster the economy as the international financial crisis crimps overseas sales and weaker sentiment slows consumer spending. The central bank board, led by central bank chief Jose Dario Uribe, hopes to provide Colombians with more cash to spend on big-ticket items amid a weakening of industrial output and retail sales in recent months. Moderating domestic growth in the $330 billion economy has been exacerbated by a strong currency, which boosts costs for exporters which earn in dollars but pay costs in pesos. The peso lost 0.33 percent in early trading on Friday to 1,815 per dollar, but has gained 6.6 percent so far this year. INCOMING FINANCE MINISTER MORE AGGRESSIVE? A military crackdown on drug-funded insurgent groups has made Colombia much more attractive to investors, once fearful of visiting the nation as Marxist FARC rebels and paramilitary groups bombed corporate installations and kidnapped workers. Even as the economy slows, the new optimism may bring as much as $17 billion in foreign direct investment this year, Echeverry has said, putting more pressure on the peso. The government has bought $500 million in the past two weeks to bolster efforts by the central bank to hold back the peso. Incoming finance minister Cardenas, an economist from the University of California at Berkeley, said late on Thursday he was aware of the problems caused by the strong currency and would use "all necessary tools to fight it." "Cardenas will take a more aggressive foreign exchange stance," said BNP Paribas analyst Nader Nazmi in a note to investors. "He does not see an appreciated peso as a sign of Colombia's strength, but considers it as a potential source of vulnerability to global forces." Nazmi also expects Cardenas to seek further interest rate cuts when he takes over as government representative on the board. RATE CUT ON FRIDAY A better-than-expected reading for manufacturing in June may lead some board members to waver at the Friday meeting. Of the 35 economists polled by Reuters, 28 expect another cut and the remainder forecast the bank will hold off to analyze second quarter economic data that will be released on Sept. 20. The Reuters poll was conducted before data showed industrial output rebounded 2.8 percent in June, reducing some of the urgency to cut rates. Discussion has weighed more heavily on the global financial climate in recent policy meetings as inflation remains anchored near the mid-point of the bank's 2 percent to 4 percent inflation target range for the year. "The board has a tendency to surprise with risk of inaction at the policy meeting after stronger than expected retail sales and industrial production," said Siobhan Morden, head of Latin America strategy at Jefferies & Co. Inc. in New York. "Meanwhile, global risks have receded while the central bank argues that the recent rate cut was explained mostly for external risk factors." The bank has already lowered its official estimate for 2012 gross domestic product growth to between 3 percent and 5 percent, but Uribe said last month that it expected expansion of at least 4 percent. Next year's growth is more uncertain, he said, forecasting a growth of as low as 2 percent. Link this Share this Digg this Email Reprints

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