Argentina’s exchange rate on Thursday suffered its steepest daily decline since the country’s devastating 2002 financial crisis, extending the previous day’s losses as the central bank gave up its battle against the peso’s decline.
Having shed more than 30 per cent of its reserves last year, the central bank this week abandoned its policy of supporting the peso by intervening in the foreign exchange market.
The new policy set the stage for Thursday’s losses in the value of the currency and increased worries about what is already one of the world’s highest inflation rates.
The peso-dollar exchange rate on the interbank market hit the 8 mark, having broken through the 7 barrier on Wednesday. It closed at 8.0 to the dollar, down 11 per cent on the day following a 3-per-cent decline on Wednesday.
Argentina’s black market peso fell 6.09 per cent on Thursday to 13.05 per greenback.
“Yesterday the central bank neither bought nor sold dollars, which tells you what its position is with respect to the exchange rate,” cabinet chief Jorge Capitanich told reporters on Thursday.
Central bank reserves stood at $29.44-billion.
On Thursday the bank intervened but by a scant $80-million, according to local foreign exchange traders.
Due to local currency controls, the black market is the only way for many Argentines to get their hands on dollars as confidence in Latin America’s No. 3 economy falls and inflation soars. Given the country’s history of repeated financial crises, Argentines like to save in dollars.
According to private analysts, consumer prices rose more than 25 per cent in 2013, although discredited official data clocks inflation at less than half that.
Unorthodox policies, from currency controls meant to stop capital flight to heavy stimulus spending unencumbered by inflation targeting, have made Argentina a no-go zone for all but the most risk-hungry investors.
Argentina’s key grains sector has cut exports as farmers hoard their crops rather then expose themselves to the swooning local currency. This has contributed to the scarcity of dollars that is debilitating the peso.
Every time President Cristina Fernandez tightens capital controls in a bid to shore up the country’s wobbly balance of payments, it increases the scramble for dollars. This in turn contributes to the fall in the value of the black market peso and higher inflation.
The new year has begun with analysts expecting a 30-per-cent rise in consumer prices in 2014. That would be the highest rate since 2002, when millions of middle-class Argentines were pushed into poverty by a crisis punctuated by a sovereign bond default and 41-per-cent inflation.