The peso climbed as much as 1.3 percent today following a June 1 report that showed the monthly inflation rate soared to 0.93 percent in May, more than double the 0.4 percent median forecast in a Bloomberg survey of economists. Colombian markets were closed yesterday for a national holiday.

``There's no question we've got an inflationary problem,'' said Felipe Campos, an analyst at Bogota-based brokerage firm Alianza Valores. Expectations central bankers ``will raise rates in the next meeting are helping the peso soar because of the yield differential'' between U.S. and Colombian rates.

The peso gained 1 percent to 1,729.25 per U.S. dollar at 4:50 p.m. New York time, from 1,747 on May 30, according to the Colombian foreign-exchange electronic transactions system, known as SET-FX. The currency earlier reached 1,725.15, the strongest since June 30, 1999.

Increased foreign direct investment and the widening gap between U.S. and Colombian benchmark rates have fueled a 16.7 percent rally in the peso this year, the second-biggest advance, after the Slovakian koruna, among 26 emerging-market currencies tracked by Bloomberg. The 7.75 percentage point difference between U.S. and Colombian benchmark rates is the widest since July 2001.

Banco de la Republica last month left the key rate at a six- year high of 9.75 percent. Campos forecasts the bank will raise the key rate to 10 percent at its June 27 meeting, leaving it there through year-end.

`Catastrophic'

Colombian Finance Minister Oscar Ivan Zuluaga said in an interview with Bogota-based La Republica newspaper that a peso stronger than 1,500 per dollar would be ``catastrophic'' for the economy, and the government is ready to take measures to stem appreciation.

In a bid to slow the five-year, 65 percent rally in the peso, the government last week strengthened capital controls.

The government raised deposit requirements on new portfolio investment in the country, such as the purchase of bonds and stocks, to 50 percent from 40 percent. Multinationals will also be required to keep foreign direct investment in Colombia for a minimum of two years, the Finance Ministry said in a May 30 statement.

Higher-Yield Bets

Bond yields soared today as investors increased bets on higher rates. The yield on benchmark 11 percent government bonds due July 2020 rose 28 basis points, or 0.28 percentage point, to 11.66 percent, according to Colombia's stock exchange. The bonds' price dropped the most since Jan. 21, falling 1.753 centavo to 95.731 centavos per peso.

Colombia's annual inflation rate jumped to a four-year high of 6.4 percent in May, exceeding the central bank's 3.5 percent to 4.5 percent inflation target range.

``Investors are demanding higher returns on fixed-rate bonds as inflation eats into profits,'' said Eduardo Reyes, chief economist at Tradition brokerage's unit in Colombia.

Chile's peso was little changed at 484.77 per dollar from 484.5 yesterday. The peso's 4.4 percent drop in the past month is the biggest among the six most-traded currencies in Latin America. Chile's central bank has bought $50 million daily in the currency market since April 14 in an effort to weaken the peso and bolster exports. Today, it purchased dollars at an average price of 485.32 pesos.

The yield on a basket of Chile's five-year peso bonds in inflation-linked currency units, called unidades de fomento, was little changed at 2.83 percent, according to Bloomberg composite prices.

`Ready to Act'

Chilean central bank policy makers considered a quarter- percentage point rate increase at their May 8 meeting, before unanimously voting to leave their target rate at 6.25 percent, according to minutes published today.

``We sense the central bank is ready to act by tightening monetary policy further, perhaps by changing first the bias from neutral to rate-hawkish, if the May inflation print surprises significantly on the upside,'' Goldman Sachs Group Inc. economist Alberto Ramos wrote today in a note to clients.

Chile's consumer prices rose 0.7 percent in May after increasing 0.4 percent the previous month, according to the median estimate of 21 economists surveyed by Bloomberg. The National Statistics Institute is scheduled to release the monthly report on June 5.

Argentine Peso

In Argentina, the peso advanced 0.6 percent to 3.069 per dollar from 3.087 yesterday. The yield on the country's inflation-linked peso bonds due in December 2033 rose 7 basis points to 10.07 percent, according to Citigroup Inc.'s unit in Argentina.

Peru's sol gained for a second day, strengthening 0.8 percent to 2.823 per dollar from 2.845 yesterday. The yield on the nation's 8.6 percent sol-denominated bonds due in August 2017 rose 1 basis point to 6.48 percent, according to Citigroup Inc.'s unit in Peru.

Venezuela's bolivar gained 1.4 percent to 3.55 per dollar in the black market from 3.6 yesterday, traders said. Venezuela pegs the currency at an official exchange rate of 2.15 per dollar under restrictions imposed in 2003. Venezuelans turn to the parallel market when they can't get approval from the government's Foreign Exchange Administration Commission to buy dollars at the official rate.

By Andrea Jaramillo