Investment brings peso appreciation

[NewsWhore]

Bear Stearns reports that healthy levels of foreign investment and a significant contraction in the size of the Dominican Republic's monetary base have underpinned a 4.2% revaluation of the Dominican peso so far this year, with 3.7% of the strengthening taking place during the past six weeks alone. Franco Uccelli, who analyzes the DR for the brokerage firm says that this has caused concern among the country's monetary officials. He explains that the Central Bank has identified sizeable increases in foreign portfolio investments, which have been attracted by the country's improved macroeconomic environment and by its relatively high-yielding peso-denominated assets, as a key factor in the appreciation of the currency. "In response, the Central Bank has implemented new measures designed to limit foreign participation in its weekly auctions of short-term paper (maturities of up to one year). By barring foreign financial institutions from participating in its weekly auctions (participation in its more sporadic auctions of longer term paper is still allowed), the Central Bank is hoping to stem the flow of what it views as 'hot money' in search of a quick profit", he explains. "We believe that what the Central Bank has failed to recognize, however, is that for as long as its securities continue to afford relatively attractive yields, foreign investors will continue to invest in them, even if that means having to execute their purchases, which according to some estimates may have totaled as much as US$80 million in a single week, through a local intermediary, as the new regulations now require".

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