Argentina peso recovers as central bank intervenes

BUENOS AIRES – Argentina’s peso surged on the black market Friday, as the central bank stepped in to reverse a four-day slide and contain inflationary expectations.

The peso shot up to 11.55 per U.S. dollar in midday trading after falling to 12 per dollar Thursday, the first recovery after tumbling this week from 11.30 on May 16.

President Cristina Fernandez de Kirchner’s economic team appears to have rallied to reel in the black market exchange rate, a leading indicator of confidence in Latin America’s third-largest economy. A drop on the black market, which operates in the back rooms of money houses due to tight restrictions on buying dollars officially, can spread nervousness and spur a rise in capital flight.

A drop in the black market peso exchange rate in turn raises the threat of accelerating consumer prices in a country already burdened by one of the world’s highest inflation rates. It is running at 40 percent annualized, according to the Cato Institute, a Washington D.C.-based think tank.

The central bank started restricting the sale of dollars for imports of more than $200,000 to conserve its hard-currency reserves at $28 billion, up from a seven-lower low of $26.7 billion on April 4 but still a long way down from a peak of $53 billion in 2011.

- Shift in thinking

The drop this week came after three months of calm on the exchange market following a shift to pragmatism.

The central bank devalued the peso 20 percent against the dollar in January and then jacked up interest rates to 30 percent, encouraging people to save in pesos instead of dollars.

But over the past month the monetary authority has reduced interest rates to 27 percent and started to devalue the official exchange rate after holding it steady at 8 per dollar since the devaluation.

“With the decline in interest rates, people turned to the dollar,” said Federico Thomsen, an economist at E. F. Thomsen, an economic and political consulting firm in Buenos Aires.

- This new calm may be hard to contain

“The central bank is walking a very narrow path,” Thomsen said.

If the bank depreciates the peso predictably on the official market, which it administers by buying and selling dollars out of its hard-currency reserves, then the market could take advantage, he said.

When the bank followed this practice last year, for example, exporters would delay sales on expectations of getting more pesos from their sales and importers would push forward transactions. This put strain on the central bank’s hard-currency reserves, leading to a decline that ultimately ended in the 20 percent devaluation in January.

The government is trying to hold the reserves at $28 billion as a source of financing. It relies on the reserves to pay for imports and service the national debt given that it can’t sell bonds on global markets for financing until it fully settles a $100 billion default from 2001.

If in another scenario the central bank allows the peso to drop abruptly, then rumors could fly of instability and drive up demand for dollars, Thomsen said.

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