SANTIAGO Aug 20 Chile's peso currency may fall even further, despite having sunk to an over five-year low this week, analysts said, as central bank monetary policy easing, market volatility and a recovering U.S. economy boost the value of the dollar.
The peso has slipped around 19 percent versus the dollar since January 2013 and ended Wednesday's trading session at 584.20 per dollar, down 0.63 percent.
An expansive monetary policy, with Chile's central bank cutting the benchmark interest rate by 150 basis points since October in a bid to reverse an economic slowdown, has made the peso less attractive and helped fuel its depreciation.
External factors have also played a part, said Pedro Tuesta, an economist with 4Cast in Washington, D.C.
"The peso will continue to depreciate if the economy doesn't recover," said Tuesta.
"Right now there's not much risk aversion and that's slowing the depreciation, but if risk aversion makes a comeback, owing to geopolitical factors or because data points to the U.S. Fed hiking interest rates before the third quarter 2015, then the peso could easily reach 600," he said.
That would be its lowest level since April 2009.
The peso's slide has helped fuel inflation, which topped the central bank's 2 to 4 percent target range and gave it reason to pause its easing cycle from April to June.
But with inflation expectations anchored around 3 percent in the medium-term and the bank saying it expects consumer prices to subside, the benchmark interest rate was cut by 25 basis points in both July and August.
Market analysts think more cuts are coming.
On Monday, Chile posted its weakest quarterly economic growth since recession in 2009.
A day after the disappointing growth data was published, central bank president Rodrigo Vergara reiterated the bank's easing bias, saying the board will consider the possibility of making more rate cuts, with economic recovery seen slower than previously expected.
"Weakness in the domestic economy, which has been deeper (than initially expected), is consistent with a weaker exchange rate," said Cesar Guzman, economist at Inversiones Security in Santiago.
One positive effect of the weaker peso has been a potential boost to exporters, whose products are becoming more competitive abroad.
Apart from being the globe's top copper producer, Chile is also a large exporter of fresh fruit, wine and salmon. (Additional reporting by Felipe Iturrieta and Froilan Romero; Writing by Anthony Esposito, Editing by Rosalba O'Brien and Diane Craft)