Chile’s peso slid after central bank President Rodrigo Vergara raised the prospect of capital controls to mitigate the flood of dollars from the US Federal Reserve’s quantitative easing program. The peso depreciated 0.1% to 471.25 per dollar. It had earlier appreciated to 468.35 per dollar as copper gained in New York.

Fed Chairman Mr Ben S Bernanke’s plan to fight unemployment by buying USD 40 billion of mortgage bonds a month may mean emerging market currencies appreciate, producing imbalances in small open economies. While Chile’s central bank can buy dollars or introduce capital controls, premature intervention risked being ineffective.

Mr Felipe Alarcon an economist at Banco de Credito & Inversiones in Santiago who used to work at the central bank said that “The remark about being wary of premature intervention is a sign that they are definitely studying it. With the QE3 comment it’s a chronicle of a death foretold. We can’t fight with conventional measures against the tide of dollars coming our way.”

Mr Vergara said that selling local currency bonds to offset the extra money being added to the financial system in a currency intervention could push up the cost of the measure, eating into the central bank’s balance sheet.

Copper rose on speculation sliding profits for industrial companies will spur stimulus measures in China, the world’s largest consumer of the metal and the biggest buyer of Chilean copper. Copper for December delivery rose 1% to USD 3.746 a pound on the Comex in New York.

Source - Bloomberg

(www.steelguru.com)