Forex
Argentina, in dollar love affair, agonizes over divorcing the peso
© Reuters. FILE PHOTO: A one hundred Argentine peso bill sits on top of several one hundred U.S. dollar bills in this illustration picture taken October 17, 2022. REUTERS/Agustin Marcarian/Illustration/File Photo
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By Marc Jones, Eliana Raszewski and Rodrigo Campos
LONDON/BUENOS AIRES/NEW YORK (Reuters) – María Barro, a 65-year-old domestic worker in Buenos Aires, buys a few dollars each month with her peso salary, a hedge against Argentina’s persistent inflation now running at over 100% and a steady devaluation of the little-loved local peso.
The peso currency is now in the crosshairs of the country’s dark horse presidential front-runner, libertarian radical Javier Milei, who has pledged to eventually scrap the central bank and dollarize the economy, Latin America’s third largest.
Milei – facing a tight three-way battle with traditional political candidates on the right and left ahead of an Oct. 22 vote – says savers like Barro underscore why Argentina should shed the peso.
“I try to buy dollars, no matter how little,” said Barro, who started to buy greenbacks on parallel markets in 2022 when 2,000 pesos got her $10. Now it would get her $2.70. “Pesos go like water and every day they are worth less.”
Barro supports the idea of a dollarized economy in theory, but says she doesn’t like Milei’s aggressive style, which involves regular expletive-laced tirades against rivals and even the Pope. She is still undecided about her vote.
Milei’s dollarization plan has sharply divided opinion: his backers argue it is the solution to inflation near 115% while detractors say it an impractical idea that would sacrifice the country’s ability to set interest rates, control how much money is in circulation and serve as the lender of last resort.
“The argument for dollarization is that there is no price stability and the independence of the central bank is an illusion,” said Juan Napoli, a Senate candidate for Milei’s Liberty Advances party.
Napoli admitted Argentina was not yet ready for full dollarization. Milei and advisers have talked about a nine-month to two-year time frame.
“It requires a great political agreement between us and also having sufficient reserves,” Napoli said. The central bank’s current net foreign currency reserves are deep in negative territory. “It will take a while, it won’t happen immediately.”
‘ABSOLUTE LAST RESORT’
Dollarization has been tried elsewhere, usually either replacing the local currency with dollars at a set exchange rate, or intervening in the markets to ‘peg’ the local tender to the dollar. The central bank loses its monetary policy setting role, but often is kept to handle technical and administrative tasks such as reserves management and payment systems.
Argentina pegged its peso to the dollar in 1991 under the neo-liberal economic policies of President Carlos Menem and even debated full dollarization. However, it was forced to undo the peg a decade later as a major economic crisis and run on the peso sparked riots and saw the currency board collapse.
Bolivia has a dollar peg, Venezuela has a quasi-dollar driven economy, while Ecuador, El Salvador and Panama all officially use the dollar. Zimbabwe dollarized and then abandoned it, though economists estimate that 80% of its local economy remains in dollars.
Argentina’s $650 billion economy, though, would be by far the largest dollarization experiment, were it to happen. The country is a major global exporter of soy, corn and beef, has one of the world’s largest reserves of electric battery metal lithium and huge shale gas and oil reserves in Vaca Muerta.
Many Argentines themselves are unconvinced, fearing loss of economic independence and over-reliance on the United States. Polls in recent months show more people oppose the idea, though some new surveys suggest support is rising as inflation peaks.
“I don’t know what’s the solution, but I disagree with dollarization,” said Martina Rivero, 25, who works at a baby clothes store in Buenos Aires’ trendy Palermo district.
Milei’s presidential rivals, Economy Minister Sergio Massa and conservative ex-security minister Patricia Bullrich, have both shot down the idea of dollarization as impractical.
The government also has a $44 billion loan program with the International Monetary Fund (IMF), which means economic policy making often comes with strings attached. Milei spoke with the IMF in August, with dollarization part of the discussion.
While the IMF has not commented on the plan, many experts see it as a drastic move.
“To me, it is an absolute last resort,” said Olivier Blanchard, a former IMF chief economist and now an academic. “It’s very costly to give up flexibility of the exchange rate.”
DOLLARS UNDER THE MATTRESS
Mark Sobel, a veteran U.S. Treasury official now at the OMFIF policy think tank in the United States, said dollarization meant authorities would lose the ability to act as a lender of last resort, which would “heighten the vulnerability of the financial system.”
Instead, he said the central bank needed to stop printing money to fund the Treasury and cut its fiscal deficit.
For many, the issue is that Argentine savers’ love of the dollar is almost impossible to undo. Many were burnt when the government confiscated, froze or forcibly converted deposits in 1989 and 2002 in what is locally known as the “corralitos”. Trust has been hard to win back since.
A widely cited bit of official data suggests that Argentines have as much as $371 billion in dollar assets, much of it outside the local financial system, reflecting decades of people putting non-peso savings out of the government’s reach, weakening the domestic economy.
“Savings now get stuffed in the mattress or at best to invest in another country. So the link between savings and investment in Argentina is broken,” said Facundo Martinez Maino, an economist who worked on Bullrich’s economic plan.
That plan supports formalizing a “bi-monetary” system the country already has informally to bring those squirreled-away dollars back into the formal financial system.
“Dollarization is a huge fantasy and it is a big campaign lie,” said Martinez Maino. “Not even the most fanatical, fervent supporter of dollarization in Argentina can argue for it seriously right now. For a simple reason. Argentina has no reserves.”
In a recent public war of words, Milei said Bullrich’s plans were “cowardly, lukewarm, and would end in hyperinflation and bloody dollarization”.
Supporters of dollarization say it would boost the country’s risk premium – good news for long-suffering investors – and should be feasible by first converting just physical cash.
Argentina’s monetary base of cash in circulation and deposits is 6.15 trillion pesos, around $17.5 billion at the official exchange, central bank data show. At widely-used parallel exchange rates, however, that’s only $8.4 billion.
“It is already a principle that Argentines practice on a daily basis. They keep huge amounts of dollars in their houses,” said Riccardo Grassi at Mangart Advisors, a Switzerland-based hedge fund involved in Argentina’s huge 2020 debt restructuring.
“Dollarization is a rational idea,” said Grassi.
‘LACK OF CONFIDENCE IN THE PESO’
On the streets of downtown Buenos Aires, there are signs everywhere with dollar prices alongside those in pesos. Some things – houses or cars – are closely linked to the dollar already and expensive, while other prices are held artificially low by subsidies, including utilities, fuel pump prices and public transport.
Some local firms already opt to pay salaries, at least in part, in dollars. Some 20% of local bank deposits are dollarized, although that doesn’t catch greenbacks stashed outside the banking system.
Claudio Loser, a former IMF director for the Western Hemisphere, said dollarizing fully, though, would be a “terrible shock” to the economy as holders of pesos would exchange them at a very high rate, diluting savings. Wealthier people with stashed dollars would have more protection.
Back on the streets of Buenos Aires, 18-year-old student Nicolas Ventrice was in favor of dollarization and Milei, though he admitted he didn’t really understand what it involved.
“What motivates young people the most is the dollarization of the country,” he said. “(Milei) explains it more or less, though I never fully understand how he is going to do it… all that stuff is a bit confusing.”
HONG KONG/SHANGHAI (Reuters) – Hong Kong has no intention and sees no need to change the system that pegs the city’s currency in a tight band to the U.S. dollar and has the ability to defend it, the chief executive of Hong Kong’s de facto central bank said on Thursday.
Eddie Yue made the remarks amid recent strength in the Hong Kong dollar, which surged to a 3-1/2 year high against the U.S. currency last week, not far from testing the strong end of the system’s trading band.
Under Hong Kong’s Linked Exchange Rate System (LERS), the financial hub’s currency is confined to a range between 7.75 and 7.85 to the greenback, and the Hong Kong Monetary Authority (HKMA) is committed to intervening to maintain the band.
“Despite the recent interest in LERS and even speculation regarding potential geopolitical shocks, the Hong Kong dollar market has continued to operate smoothly in accordance with the design of the LERS,” Yue said in a statement posted on HKMA’s website.
“And let me reiterate, we have no intention and we see no need to change the LERS.”
The financial hub has sizeable foreign reserves of over $420 billion, equivalent to about 1.7 times its monetary base, which Yue said meant “ensuring the smooth functioning of the LERS at all times”.
A string of factors, including seasonal funding shortages, buying by mainland Chinese investors and listed companies’ increasing dividend payments contributed to the tight liquidity in Hong Kong and underpinned the currency, traders and analysts said.
Yue said the HKMA was paying close attention to discussions about the exchange rate system, which has weathered numerous economic cycles and multiple financial crises.
“As a small, open economy and major international financial centre, exchange rate stability is crucial for Hong Kong,” Yue said, dismissing the view that a strengthening Hong Kong dollar alongside the greenback would hinder the city’s economic recovery.
Analysts at Barclays (LON:) expect the Hong Kong dollar to stay close to 7.75 per dollar in January, but look for it to weaken subsequently.
“We think global factors are likely to keep sentiment subdued and support , especially after the positive impulse from dividend payouts by HK-listed firms and (as) IPO activity fades,” they said in a note published this week.
“The onshore buying of Hong Kong stocks may continue due to lack of better investment alternatives, but it would need more foreign participants to buy Hong Kong stocks for HKD demand to be lifted more durably.”
By Gabriel Burin
BUENOS AIRES (Reuters) – Brazil’s real currency is forecast to trade slightly stronger, at around 6 per U.S. dollar at the end of 2025 following a punishing year of losses, a Reuters poll of foreign exchange analysts showed.
The real fell around 22% in 2024, mainly due to investor disappointment about a fiscal package introduced by President Luiz Inacio Lula da Silva’s economic team to correct worrying debt trends.
Losses in Brazilian assets only stopped after Brazil’s central bank sold nearly 10% of its reserves throughout the last three weeks of 2024. The real has now stabilized following last month’s meltdown to a record low.
But like many other emerging market currencies, there is little prospect for making much positive headway this year so long as the U.S. retains its dominance in currency market bets.
The currency is expected to trade at 5.94 per dollar in one year, 2.7% stronger than its closing value of 6.10 on Tuesday, according to the median estimate of 25 analysts polled Jan. 3-8.
“Pressure on the real was exacerbated by the market’s negative perception of progress of the government’s spending cut package in Congress,” analysts at Sicredi wrote in a report.
“Despite the (central bank) intervention, unfavorable dynamics for the Brazilian currency continue to be a significant challenge.”
In December, Banco Central do Brasil (BCB) sold $22 billion of its reserves in spot foreign exchange markets and another $11 billion through repurchase agreements. It has not intervened again in the first days of 2025.
“Higher yields in the U.S. and the perception of greater fiscal risk in Brazil should keep the currency at the new level (6 per dollar),” analysts at Banco Inter wrote in a report.
U.S. Treasury yields edged higher on Tuesday after data showed the U.S. economy remained resilient, supporting market expectations the Federal Reserve may have only one quarter-point interest rate cut left to deliver.
Latin American currency strategists are also waiting for what U.S. President-elect Donald Trump announces after his inauguration on Jan. 20, wary of any potential plan to apply sweeping tariffs that could hit the Mexican peso even further.
The currency fell nearly 19% in 2024 on tariff fears as well as concerns related to controversial judicial reforms.
The peso is forecast to trade at 20.90 per dollar in 12 months, or 2.8% weaker than its value of 20.31 on Tuesday.
(Other stories from the January Reuters foreign exchange poll)
(Reporting and polling by Gabriel Burin in Buenos Aires; additional polling by Indradip Ghosh and Mumal Rathore in Bengaluru; Editing by Alexandra Hudson (NYSE:))
Investing.com – The US dollar steadied Thursday, underpinned by rising Treasury yields after hawkish comments from the Federal Reserve and strong economic data furthered bets on a slower pace of rate cuts.
At 04:35 ET (09:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely unchanged at 108.920, just shy of the two-year high it touched last week.
Trading ranges are likely to be limited Thursday, with US traders on holiday to honor former President Jimmy Carter, with a state funeral due later in the session.
Dollar retains strength
The of the Fed’s December meeting showed policymakers increasingly geared towards a slower pace of rate cuts in 2025 amid new inflation concerns, while recent jobs data has pointed to underlying strength in the labor market.
Additionally, Fed officials saw a rising risk that the incoming Trump administration’s plans may slow economic growth and raise unemployment.
This has seen the yield on the benchmark 10-year U.S. Treasury note hitting its highest level since April in recent days.
“The market now prices a pause at the 29 January meeting and does not fully price a 25bp cut until June,” said analysts at ING, in a note. “We have five Fed speakers later today, but the next big impact on expectations of the Fed easing cycle will be tomorrow’s December NFP report, where some see upside risks.”
“Equally, the dollar is likely to stay strong into Trump’s inauguration on 20 January.”
German economic weakness weighs on euro
In Europe, fell 0.1% to 1.0306, remaining close to the two-year low it hit last week on recent signs of economic weakness, particularly in Germany, the region’s largest economy.
and rose more than expected in November, according to data released earlier Thursday, but the outlook for the eurozone’s largest economy remains weak.
Exports increased by 2.1% in November, while industrial production rose by 1.5% in November compared to the previous month.
However, “this rebound in industrial activity unfortunately comes too late to avoid another quarter of stagnation or even contraction,” said Carsten Brzeski, global head of macro at ING.
The is widely expected to ease interest rates by around 100 basis points in 2025, and this, slough with concerns over US tariffs, could see the single currency fall to parity with the US dollar this year.
traded 0.5% lower to 1.2296, falling to its weakest level since April on concerns surrounding the UK bond market as British government bond yields hit multi-year highs.
“The gilt sell-off has … dented that confidence in sterling and the risk now is that sterling longs get pared as investors reassess sterling exceptionalism,” ING added.
Yuan weakens after inflation data
In Asia, rose 0.3% to 7.3542, with the Chinese currency remaining close to its weakest levels in 17 years after barely grew in December, while the shrank for a 27th consecutive month.
The print showed little improvement in China’s long-running disinflationary trend, and signaled that Beijing will likely have to do more to shore up economic growth.
dropped 0.2% to 158.08, with the Japanese currency boosted by average cash earnings data reading stronger than expected for November.
The data furthered the notion of a virtuous cycle in Japan’s economy – that increasing wages will underpin inflation and give the Bank of Japan more impetus to hike interest rates sooner, rather than later.
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