UPDATE 2-Peru regulator eyes rule to cut forex volatility

By Patricia Velez and Marco Aquino

LIMA, Oct 28 (Reuters) - Peru will soon adopt a rule to limit the foreign exchange exposure of banks as part of an effort to reduce currency volatility, an official with the country's banking and insurance regulator said on Wednesday.

Article Controls

email

reprint

newsletter

comments

share

del.icio.us

Digg It!

yahoo

Facebook

Twitter

Reddit

rss

Yahoo! Buzz

The move appears unrelated to tough measures Colombia and Brazil have taken to curb demand for their rallying currencies. And over the longer term, the Peruvian measure might actually reduce purchases of dollars and increase demand for the local currency, the sol.

As a result of decades of financial instability, about half of all bank deposits in Peru are held in dollars. Thanks to stability in recent years, the government has periodically adopted measures to encourage lenders and borrowers to move into the sol as a way to cut currency exchange risks in the financial system.

Central Bank President Julio Velarde said in Congress on Wednesday he wants to reduce the limit for long positions that banks can hold in dollars to 50 percent of their assets, from the current ceiling of 100 percent.

One central bank official said the long positions of banks in dollars at the moment is around 40 percent -- suggesting the rule might not cause any swift changes in the level of Peru's sol and is mainly aimed at reducing long-term volatility.

Currency traders were not overly concerned.

'This won't have any impact on future prices for the currency, it's a regulatory measure to have more control over the total currency exposure of banks. In some ways it will reduce volatility,' a trader at a Peruvian bank said.

The official at Peru's banking and insurance regulator, which would implement the new foreign exchange rule, said it would not cut the limit as sharply as the central bank wants, at least not initially.

'We have this limit under revision, it's going to change but not by the terms the central bank suggested.' the official said.

Luis Galarreta, head of the Economy Comission in Congress, said the rule limit on long positions would be trimmed to 80 percent, then fall gradually to around 50 percent.

VOLATILITY AND GROWTH

Peru's central bank, which follows an inflation-targeting regime, says it does not have a desired level for its currency.

The sol gained some 3.5 percent in the two months through mid-October, but has weakened over the past week to around 2.90 per dollar. It has gained about 7 percent against the dollar this year.

Colombia and Brazil, where the real is up 35 percent this year, recently took steps to halt strengthening of their currencies.

The proposal discussed by Velarde on Wednesday was part of a broader set of measures the central bank said it is studying to reduce 'macroeconomic vulnerabilities.'

Several of them dealt with ways to grow Peru's mortgage market using credits denominated in soles. Currently, many people have home loans denominated in dollars but get paid in soles.

Pablo Secada of the Peruvian Institute of Economics, a think tank, said lower forex volatility will make it easier for foreign companies to invest in Peru -- helping long-term economic growth.

'This will effectively reduce volatility. It's been proven that in dollarized economies like Peru reducing currency volatility encourages growth and investment,' he said.

(Reporting by Patricia Velez, Marco Aquino and Ursula Scollo)

((terry.wade@reuters.com; +51 1 221 2130; Reuters Messaging: terry.wade.reuters.com@reuters.net)) Keywords: PERU ECONOMY/CURRENCY

(For help: Click 'Contact Us' in your desk top, click here or call 1-800-738-8377 for Reuters Products and 1-888-463-3383 for Thomson products; For client training: training.americas@thomsonreuters.com ; +1 646-223-5546)

COPYRIGHT

Copyright Thomson Reuters 2009. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.

Neither the Subscriber nor Thomson Reuters warrants the completeness or accuracy of the Service or the suitability of the Service as a trading aid and neither accepts any liability for losses howsoever incurred. The content on this site, including news, quotes, data and other information, is provided by Thomson Reuters and its third party content providers for your personal information only, and neither Thomson Reuters nor its third party content providers shall be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon.