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argentine_pesoBUENOS AIRES: Argentina's peso dipped on Wednesday on the formal market, where the central bank intervenes, and slumped on the parallel, informal market as investors adjust to new controls.

The government this week ordered that tax officials authorize all foreign currency purchases. Officials said the move would combat tax evasion and money-laundering, but many Argentines saw it as a bid to forcibly reduce dollar demand.

Trade volume has shrunk but demand for US dollars persists because most investors expect the government will allow the peso to weaken more quickly to regain its competitive edge, now that President Cristina Fernandez has secured a second term in office.

On the informal market, dominated by foreign exchange houses, the peso shed 1.5 percent to end at 4.67/4.69 per dollar, after sinking 2.6 percent in the previous session.

On the formal, interbank market, the peso shed 0.24 percent to close at 4.25/4.2525 per dollar.

The spread between the two markets has widened to record levels as investors look for ways around the new controls.

The central bank bought about $10 million on the formal market after weeks of selling its foreign reserves to stem the peso's losses as capital flight surged. At the same time, state-run Banco Nacion bought about $30 million, traders said.

"The trend was reversed as we expected, and so today we bought (dollars), which hadn't happened in recent weeks," a central bank source said, requesting anonymity.

The central bank sold $1.88 billion of its foreign reserves last month to keep the market supplied with greenbacks and stem a sharp depreciation of the peso. This sapped a key source of financing since the government has used reserves to pay debt.

Fitch ratings agency said in a statement that it expected the Argentine government to keep exchange rate stability as a "primary policy objective."

"Given the fact that a stable peso exchange rate has been the anchor of the Argentine economy, a continuation of unorthodox and increasingly stringent exchange controls is likely," the agency said.

On Wednesday, the implicit exchange rate used to buy Argentine assets traded abroad, such as bonds and ADRs, closed at 4.73 pesos per dollar, down from 5.05 on Tuesday, traders said.

These deals tend to reflect capital flight since they allow investors to send dollars abroad unfettered by controls.

The government began unveiling currency-related measures less than a week after Fernandez won a landslide reelection on Oct. 23. Many business and farm-sector leaders complain about her government's market intervention.

Copyright Reuters, 2011

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