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Argentina, in dollar love affair, agonizes over divorcing the peso

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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.”

Forex

Dollar rebounds after selloff on cooling activity; euro hands back some gains

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Investing.com – The U.S. dollar rebounded in early European trading Wednesday after the prior session’s selloff, with traders keeping a wary eye on upcoming economic data for further clues of the Federal Reserve’s future monetary policy intentions.

At 04:40 ET (08:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 105.695, having fallen 0.4% overnight, dropping to its lowest level since April 12. 

Cooling business growth hits dollar 

The easing of tensions in the Middle East, with Iran indicating little desire to engage in all-out war with Israel following the latter’s strike last week, has resulted in the safe-haven dollar retreating from recent highs.

However, the greenback’s move lower on Tuesday was largely prompted by data showing a cooling of U.S. business growth, with activity dropping in April to a four-month low.

That said, comments from officials at the Federal Reserve have been mostly hawkish of late, suggesting that this individual data point is unlikely to result in rate cuts being brought forward to the summer.

“While activity indicators could prompt some FX moves, the kind of major repricing in Fed expectations that we saw in April can only be triggered by lower inflation, soft employment figures, or Fed communication,” said analysts at ING, in a note.   

The first-quarter data on Thursday and the , the Fed’s preferred measure of inflation, on Friday, could prompt bigger moves.

The Fed’s first rate cut is widely expected to be in September, with November the second favorite month, and June now deemed very unlikely. 

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Euro hands back some of prior session’s gains

In Europe, fell 0.1% to 1.0689, after gaining almost 0.5% on Tuesday following data that showed in the eurozone expanded at its fastest pace in nearly a year, primarily due to a recovery in services.

Sentiment in Germany, the eurozone’s largest economy, also picked up in early April, with the country’s rising to 89.4, from a revised 87.9 the prior month.

The has essentially promised a rate cut at its next policy meeting on June 6, but Bundesbank President Joachim Nagel said on Wednesday that this will not necessarily be followed by further policy easing if eurozone inflation proves stubborn.

fell 0.1% to 1.2430, dropping after gains of around 0.8% in the prior session, benefiting from overnight data showing British businesses recorded their fastest growth in in nearly a year.

The is expected to lower rates by at least half a percentage point this year, but strong data could see the central bank delaying its first cut until after the summer.

USD/JPY within sight of 155

In Asia, rose 0.1% to 154.89, trading near 34-year highs and in sight of the 155 level. 

The yen weakened even as a slew of Japanese officials warned of government intervention to support the beleaguered currency. 

The meets on Friday, and is expected to keep rates unchanged after a historic hike in March. But its outlook on inflation and economic growth will be closely watched. 

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edged higher to 7.2460, remaining close to five-month highs,  while rose 0.3% to 0.6502, near a two-week high, after consumer inflation read stronger than expected for the first quarter, pushing further above the Reserve Bank of Australia’s 2% to 3% annual target. 

 

 

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Strong CPI figures boost Australian dollar position, ING analysts say

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On Wednesday, the Australian dollar (AUD) experienced a rally following the release of higher-than-anticipated inflation data. The core measures of inflation remained above 4%, while the year-on-year headline rate slowed to 3.6%. The first quarter’s Consumer Price Index (CPI) showed a March reading of 3.5%, exceeding the consensus estimate of 3.4%.

Following the CPI announcement, Australia’s two-year swap rate rose by approximately 15 basis points, reaching its highest level since November 2023 at 4.51%. The market’s expectations for monetary policy have shifted, with the Overnight Index Swap (OIS) curve now indicating a reduced likelihood of an interest rate cut by the end of the year, leaving only 8 basis points of easing projected for the December meeting.

In a Wednesday note, ING analyst Francesco Pesole said that while the risks of another hike are not totally negligible, inflation figures were probably insufficient to warrant such a turnaround in policy.

“We think the Reserve Bank of Australia can achieve its inflation target without having to raise rates again, but may well need to digest some further bumps in inflation, which suggest further steps to the dovish side in communication will be taken with more caution,” Pesole said.

The recent economic data has been favorable for the Australian dollar, which has surged past the 0.6500 mark. While the currency remains sensitive to shifts in market sentiment, the delayed expectations of policy easing and the ability to maintain support in a stable risk environment strengthen the AUD’s position.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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Dollar recovers from PMI slump, yen closes in on 155 per dollar

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By Samuel Indyk and Kevin Buckland

LONDON (Reuters) -The U.S. dollar regained some lost ground on Wednesday following big falls against the euro and sterling the day before, while the yen remained mired near 34-year lows even as Japanese officials stepped up intervention warnings.

The – which measures the currency against six major peers including the euro, sterling and yen – was last up 0.2% at 105.85 after earlier touching the lowest since April 12 at 105.59.

It slumped 0.4% on Tuesday, driven by surprisingly robust European activity data and cooling U.S. business growth.

The euro was down 0.2% at $1.0684, following Tuesday’s 0.4% rally after data showed business activity in the euro zone expanded at its fastest pace in nearly a year, primarily due to a recovery in services.

Sterling also benefited from data showing British businesses recorded their fastest growth in activity in nearly a year, while Bank of England Chief Economist Huw Pill said interest rate cuts remained some way off. Sterling was last down 0.1% at $1.2437, having jumped 0.8% in the previous session.

By contrast, U.S. business activity cooled in April to a four-month low due to weaker demand, while rates of inflation eased slightly.

“We’d be cautious about jumping into a bearish narrative on the back of soft activity surveys, as hard data has generally helped the dollar of late,” said Francesco Pesole, FX strategist at ING.

Friday sees the release of the Fed’s targeted consumer inflation measure, the PCE deflator. Markets currently price in a 67% chance of a first U.S. rate cut by September, according to the CME’s FedWatch tool.

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“In the short term I think the dollar will continue to do well,” said Dane Cekov, senior macro & FX strategist at Nordea Markets.

“If U.S. inflation continues to strengthen, the dollar will remain in favour.”

The dollar index reached a 5-1/2-month peak of 106.51 last week as persistent inflation forced Fed officials to signal no rush to ease policy.

YEN CLOSES IN ON 155 PER DOLLAR

As the dollar has rebounded, it marked a new 34-year high against the yen at 154.98.

This week, the pair has oscillated in an extremely narrow range between that high and a low of 154.50, with traders wary that a push above 155 could raise the risk of dollar-selling intervention by Japanese officials. The dollar was last at 154.915 yen.

Japanese Finance Minister Shunichi Suzuki on Tuesday issued the strongest warning to date on the chance of intervention, saying last week’s meeting with U.S. and South Korean counterparts had laid the groundwork for Tokyo to act against excessive yen moves.

Senior ruling party official Takao Ochi told Reuters that a decline in the currency towards 160 could trigger intervention.

“If the yen slides further toward 160 or 170 to the dollar, that may be deemed excessive and could prompt policymakers to consider some action,” Ochi said.

The Bank of Japan is widely expected to leave policy settings and bond purchase amounts unchanged at the conclusion of a two-day meeting on Friday, having just raised interest rates for the first time since 2007 just last month.

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And while Japan’s central bank is likely to signal a readiness to tighten policy again this year, its ultra-cautious, data-dependent approach has limited any strengthening in the yen.

“Talk is cheap and what’s really needed to stabilise the yen is essentially either the Fed cutting or higher rates in Japan,” Nordea’s Cekov said.

The climbed 0.2% to $0.6503, after pushing as high as $0.6530 for the first time since April 12, as it rallied on the back of hotter than expected consumer price data, leading markets to abandon hopes for any rate cuts from the Reserve Bank of Australia in the near term.

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