Two Latin American central banks intervened this week to defend their currencies, which had sunk to record lows against the dollar as a continent-wide spread of economic instability and social unrest.
On Thursday, the Chilean central bank said it would sell as much as $20 billion in monetary interventions, equivalent to half of its international reserves, starting on Monday. After not doing so for three months, Brazil's central bank also sold dollars several times this week, as both nations tried to apply the currency depreciation brakes.
The movements of central banks to try to boost their currencies come as slow income growth and corruption rattles throughout Latin America, fueling the flames of social and political unrest, most recently in Chile, Colombia, Bolivia, Ecuador, and Peru. In Chile, 26 deaths and 13,000 injuries were caused by violent demonstrations.
"We've had contagion for the first time in a long time," said Ilan Solot, a currency expert at London's Brown Brothers Harriman. "Since Turkey started blowing up last year, and then Argentina, people have been asking if there would be[ other emerging markets] contagion, and the answer has always been no. But Chile has an impact on feelings[ in the region] and raises the specter of social unrest in Brazil. "Mr Solot said central bank intervention in Colombia, where nationwide street protests have been taking place over the past week," must be a possibility "given the recent slide of the Colombian peso beyond $3,500.
He said that negative feelings had also struck the Mexican peso, although there was no evidence that contagion had spread outside Latin America.
The Chilean peso has fallen 8% against this month's dollar and 14% over the year. The Brazilian real has suffered similar losses, sliding 5% this month against the dollar and 8% over the year.
"The events that have taken place in our country over the past few weeks have affected the normal functioning of the economy," Chile's central bank said in a paper released on Thursday, warning the currency intervention to begin next week and last until May 2020.
While the Brazilian government remained silent about the volume it had sold, the Chilean government announced that its policy would consist of up to $10bn in spot foreign exchange purchases and $10bn in "exchange hedging tools" sales.
Chile said it would continue to use "all available tools" to achieve its 3% annual target for inflation and attempt to stabilize the volatile exchange rate.
It has been eight years since the last intervention in Chile's currency. The central bank participated to sell dollars in 2001 and 2002 and to purchase them in 2008 and 2011.
At the end of the week, the currency regained some of its gains, though not necessarily due to the intervention of the central bank. The Ministry of Economy said on Thursday that it had previously misreported a wide margin for November's trade figures and that exports to the fourth week of the month were worth $13.5bn instead of $9.7bn as stated earlier.
The real improved on Thursday after the announcement from R$4.26 to R$4.19 to the dollar before dipping again to R$4.23 during Friday's trade.
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