Argentina peso slides on first day of new currency rules

BUENOS AIRES: Argentina set monthly limits on dollar purchases on Monday, widening the gap between the official and "black market" exchange rates with an erratic currency policy that has rattled investors and battered the peso.

By limiting the purchases of US dollars to a fifth of the purchaser's monthly wages, the government has revived doubts about its commitment to a more open currency market under measures announced on Friday.

Due to excess demand for dollars, the peso trades on the black market, or parallel market, at a discount of more than 40 percent to the tightly controlled official exchange rate.

"This is a relief, but it is not freedom. In practice, it gives just a little escape," said economist Rodolfo Rossi in Buenos Aires. "The pressure on the (black-market peso) is going to continue."

The local currency weakened 4 percent on the black market on Monday to 12 pesos per US dollar, while the official exchange rate was little changed at 8 per dollar in thin trading.

Last week, the official peso exchange rate slid nearly 20 percent as investors scrambled to make sense of the government's new currency regime.

The rapid depreciation has raised credit risks for Argentine banks, insurers and companies with foreign debts, analysts from Moody's Investors Service warned in a research note to investors.

"It remains unclear what policies the government plans to pursue to address the underlying causes of capital flight, curb inflation and restore investor confidence," the ratings agency said in a statement. "Hence, Argentina's credit quality will likely continue to face negative pressure."

Prices of Argentina's dollar-denominated bonds fell an average 2 percent in over the counter trading on Monday and the country's benchmark MerVal stock index dropped over 3.6 percent.

Moody's forecast a further 50 percent depreciation of the peso by the end of the year, with price pressures from imports pushing inflation upward to over 30 percent in 2014, from what is already one of the world's highest inflation rates.

Argentine officials, however, were quick to dismiss such risks. "There is no reason that the exchange rate should distort consumer prices," said Cabinet Chief Jorge Capitanich in a press conference detailing the new regulations. "Lots of businesses just raise their prices out of uncertainty."

Shopkeepers over the weekend hurriedly placed new price tags on imported items, from Cuban cigars to Asian televisions.

The price surge followed the government's decision to lift two-year-old restrictions on Argentines buying foreign currency, allowing savers access to coveted US dollars.

The relaxation of controls came as the central bank's foreign exchange reserves dipped under $30 billion a level suggesting its interventions in support of the anemic peso had become unsustainable.

Allowing average wage-earners to access US dollars should pressure reserves as well, because the central bank is the economy's main source of foreign exchange.

Conditioned by previous financial crises to hold savings in dollars, Argentines are obsessed with the greenback.

The currency controls regime ending on Monday forced many people to go to the black market to secure the dollars needed to protect against the weak peso and fast-rising consumer prices.

Consumer prices rose about 25 percent in 2013, according to private analyst estimates. Official data, which many economists dispute, clocks inflation at less than half that rate.

A new government consumer price index, ordered by the International Monetary Fund, is expected to be unveiled next month.

While inflationary, President Cristina Fernandez's policies were seen by most voters as the key to economic recovery from the 2002 debacle.

She easily won re-election in 2011, promising deeper market interventions and more stimulus spending unencumbered by inflation targeting.