The Colombian peso is on track for its biggest drop in three months after the central bank unexpectedly paused rate hikes and announced a program to build up dollar reserves, signaling that the currency's rally has gone too far.

The Banco de la República intervened to curb the peso's recent gains, which had reached multi-year highs against the US dollar. The surprise pause in monetary tightening caught markets off guard, leading to immediate selling pressure on the local currency.

Analysts suggest the central bank's move reflects concerns about overheating in Latin America's fourth-largest economy. The dollar reserve-building program aims to create a buffer against external volatility while signaling a more dovish stance on future policy.

Market participants had been pricing in further rate increases from Colombia's monetary authority following a series of aggressive hikes throughout the year. The unexpected pivot has prompted a reassessment of Colombian fixed-income assets and broader emerging market positioning.