Chile, From Rescuing Miners to Rescuing the US$

♠ Posted by Emmanuel in , at 10/21/2010 12:22:00 AM
This week, the Chilean President Sebastian Pinera Echenique did his victory lap here at the LSE after the successful and heartwarming rescue of the stranded miners. Again, do bear with me as I wasn't able to attend that event since LSE IDEAS' own Niall Ferguson was presenting at the same time. However, you can of course listen to President Pinera's presentation via video and podcast which you can follow through the link above.

And speaking of Chile, we turn to the more nitty-gritty, nasty business of protecting oneself from serial dollar bombardment from the US. Almost exactly a month ago, I discussed the many different countries keen on keeping the value of their currency reasonable howsoever defined by--how do I phrase this--actively participating in the currency markets. With undimmed prospects for American-led international currency war, even the in recent years passive Chile is keen on putting the brakes on the US-led jihad on fiscal sanity. Simply put, a mighty Chilean peso is not on the cards for them. Fancy that; all sorts of pesos are becoming hot property throughout Latin America after it being a term of abuse for permanently devaluing currencies during the seventies through the nineties:
Chile may take new measures as soon as this week to control its sharply appreciating currency, which has tested the Andean country's hands-off approach to markets as it aims to become a regional financial hub. Countries from Thailand to Peru have taken steps to curb their strengthening currencies as investors chase high interest rates provided by fast-growing emerging economies.

Chile Finance Minister Felipe Larrain warned, "We may have something to say this week" as the country studies "alternatives" for controlling the peso. The peso has strengthened more than 12 percent against the dollar since the end of June. But the country has held off so far on buying dollars in the local foreign exchange market, like Colombia, or raising taxes on foreign investment in local assets, as Brazil has done twice since the beginning of October.

As its peso hovers around 485 per U.S. dollar, near 28-month highs, here are some of Chile's options: One likely approach would be to offset incoming investment with increased capital outflows. President Sebastian Pinera, a billionaire businessman, said this week in London that he is not planning capital controls, and he would like to stem the peso's appreciation by encouraging more Chilean investment abroad.

Last month Peru raised the amount of assets that pension funds can hold overseas in an effort to increase dollar demand and lessen the pressure placed on its currency by capital inflows.
Actively purchasing US dollars, imposing capital controls, promoting outward portfolio investment, raising taxes on FDI...the list of potential countermeasures goes on and on. After rescuing miners, Chile finds itself in the odd position of, well, saving the US dollar.

UPDATE: Can streamlining customs procedures for exporters help offset a stronger peso? It's one measure you can try, but still...