Chile peso surges to 8-1/2-month high, stocks slip

By Alexia Vlahos

SANTIAGO, June 16 (Reuters) - Chile's peso surged to an 8-1/2-month high on Tuesday after the government said it would repatriate another $4 billion in windfall copper savings to counter a ballooning fiscal deficit, while stocks fell, traders said.

The peso CLP=CL closed 1.87 percent firmer at 554.80/555.30 per U.S. dollar, compared to Monday's close at 565.20/565.50, though it ended off the day's highs after gaining more than 3 percent in early trade.

Traders said the peso's sharp gains were an overreaction to the government's announcement on Monday that it would sell the dollars for pesos on the local market, and they expect the peso to give up more of its sharp gains.

"What we expect, after this overreaction, is for the dollar to rise gradually against the peso in search of exchange rate equilibrium," said one foreign exchange dealer.

The central bank will sell the dollars for pesos on behalf of the government starting in July. The central bank is already converting $3 billion into pesos for the government under a fiscal stimulus plan unveiled in January.

The peso is now up 15.54 percent against the dollar year-to-date after slumping 22.3 percent in 2008.

The blue-chip IPSA index .IPSA was 1.2 percent weaker at 3,200 while the all-market IGPA index .IGPA fell 0.9 percent to 15,235.

"There is profit-taking after the gains we have seen in recent months," said Rodrigo Andaur, an analyst at brokerage FIT Research in Santiago, adding the market was eyeing the central bank's monthly monetary policy meeting later on Tuesday.

The bank is widely expected to cut its target overnight lending rate 50 basis points to a record low of 0.75 percent.

The IPSA, which is up around 35 percent year-to-date, rose around 16 percent in May, when it posted its biggest gain in a single month since January 1994.

Chilean stocks hit their highest since early December 2007 last week.

Soquimich SQM_pb.SN, Chile's leading exporter of fertilizer and one of the world's biggest producers of iodine and lithium, fell 1.43 percent to 20,600 pesos, while shares in Steelmaker CAP CAP.SN fell 3.77 percent to 13,970 pesos.

Shares in Retailer La Polar LAP.SN rose 1.17 percent to 2,225 pesos.

Regional energy group Enersis ENE.SN fell 0.80 percent to 193.30 pesos a share, while electricity generator Endesa Chile END.SN fell 0.57 percent to 862 pesos.

Dominant airline LAN LAN.SN(LFL.N) fell 1.56 percent to 6,600 pesos. (Additional reporting by Froilan Romero and Manuel Farias; Editing by James Dalgleish)