Ecuador abandons fixed exchange rate

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The Independent Online
DEALERS IN the currency markets yesterday claimed their second Latin American scalp of the year, when Ecuador followed the example of Brazil and abandoned defence of its fixed exchange rate.

The Ecuadorean sucre tumbled almost 20 per cent after the central bank said it would stop maintaining fixed trading bands against the dollar.

Speaking at a press conference in Quito, Luis Jacome, head of the central bank, said the authorities would still intervene in the currency markets if the sucre came under speculative attack. According to Mr Jacome, the devaluation will help preserve Ecuador's dwindling foreign currency reserves.

The central bank has spent close to $200m over the last month attempting to defend the sucre, and also hiked short -term interest rates to more than 100 per cent. The interest rate increases crippled economic growth, and precipitated the closure of several banks.

"What they [were] doing with the exchange rate is suicidal," said Michael Henry, an economist at ING Barings, speaking before the devaluation.

Ecuador's central bank chief argued that the devaluation should allow interest rates to fall, although analysts said that the experience of Brazil - where rates are still high - suggested this may not be the case.

Analysts were also sceptical of Mr Jacome's claim that devaluation would not jeopardise attempts to bring down inflation - running at over 40 per cent.

Yesterday's devaluation follows the resignation on Thursday of Ecuador's finance minister, Fidel Jaramillo.