Argentine Peso Plummets Most Since 2002 as Depreciation Quickens

Argentina weakened the peso the most since 2002 as the government tried to arrest a decline in foreign reserves and close a gap with the burgeoning black market for dollars.

The peso tumbled 3.5 percent to 7.14 per dollar today, according to state-run bank Banco de la Nacion Argentina. That’s the biggest drop for a single day since 2002, the year the government abandoned a peg to the U.S. dollar, said Francisco Diaz Mayer, a currency trader at ABC Mercado de Cambios in Buenos Aires.

“We know they want to devalue the currency, we just don’t know what target they have in mind,” Mayer said in a telephone interview. “Perhaps the central bank is using it as a test to see the reaction but if we see a faster depreciation tomorrow we can begin to think of it as a change in strategy.”

President Cristina Fernandez de Kirchner, who said May 6 that the government wouldn’t devalue the peso, is struggling to hold onto dollar reserves that have fallen 31 percent to a seven-year low of $29.5 billion. Since changing her economy minister, cabinet chief and the head of the central bank on Nov. 18, the peso has fallen 13.8 percent, the most in the world, according to data compiled by Bloomberg.

Argentines pay as much as a record 12.15 pesos per dollar in a black market that was created after Fernandez began to restrict access to foreign currency after her re-election in 2011.

The central bank’s press office didn’t answer phone calls seeking comment on plans to depreciate the peso or a targeted exchange rate. Cabinet Chief Jorge Capitanich said early today the government would use the force of law to combat illegal currency operations.

Vanishing Reserves

Trading volume in the official currency market was about $59 million today, a third of normal volume, Mayer said.

Argentina posted the largest current account deficit in the first three quarters of 2013 since 2001, when a crisis in South America’s second-largest economy led to a $95 billion default. International reserves, which the nation uses to pay foreign creditors, have fallen or remained unchanged for 13 consecutive business days and fell $200 million yesterday, according to central bank data.

As dollars vanish from the central bank, the government has begun to seek to normalize relations with foreign creditors.

On Jan. 20, Argentina presented a proposal to the Paris Club of creditors to seek a negotiated resolution to outstanding debt of about $10 billion. The government also has begun talks to compensate Repsol SA for the stake in oil company YPF SA it nationalized in 2012, and is preparing to unveil new inflation and growth data to address International Monetary Fund concerns over the accuracy of official statistics.

‘Inflationary Spike’

The government reported inflation was less than half of the 28.4 percent estimate by private economists in 2013.

The efforts may be too late or slow to avoid a balance of payments crisis, according to Jefferies Group LLC.

“How do you motivate long term capital inflows under an unstable economic environment?” Jefferies strategist Siobhan Morden wrote today in a report. “The next phase is an inflationary spike that deters consumption, investment and undermines FX competitiveness gains.”

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