The Argentinean peso fell by more than eight percent to
against the dollar on Thursday. This is
the largest decline since the 2002 financial crisis, and fear of inflation has
seen a sharp increase. The peso has been
gradually losing strength in the past months, but officials insist this plunge
is a result of the economic forces coming together. At the end of business Thursday, the peso
closed at $7.75 to the dollar. The
government has decided not to utilize their reserves as much in an attempt to
tighten currency controls and not allow reserves to contract. Some residents have also started buying
dollars on the black market to capitalize on a better purchasing rate. Another main concern is that imported
products will cause inflation to increase since they are more expansive. The shift in Argentina’s economy has also
started to raise concerns in surrounding Latin American countries. While not as drastic, currencies has also
weakened and the stock index is depleting.
http://www.nytimes.com/2014/01/24/world/americas/argentinas-currency-falls-sharply-against-the-dollar-stirring-inflation-fears.html?ref=americas
4 comments:
I'm not surprised. Argentina has had poor leadership for a good while now. Frankly, I wouldn't be surprised if President Kirchener brought up the Falkland Island issue just to distract the public from domestic issues.
I think it's good that the government is finally trying to do something to stop sacrificing the reserves and combat the peso. At a certain point they need to do something to stop the potential inflation, especially if this potential crisis is affecting Brazil and other countries. I feel that the black market for dollars should also be addressed because it could have consequences on the Argentine economy.
This is an interesting case as even Indian Rupee has been performing horribly against the dollar. Although I dont know a lot about the Argentine economy, I could extrapolate and assume a few similarities between Argentina and India. Although weakening currencies cause short term inflation, the have a silver lining as they encourage and incentivise exports. Furthermore, depending on the elasticity of demand, the increase in price of imported products, could boost domestic demand and reduce dependence on foreign products. However oil forms the biggest import for most countries and hence this affects the price of food due to the increasing cost of transportation etc. As such this directly hits the economically disadvantaged members of society more than others. As such this it would interesting to see how the Argentine reserve bank and government deal with it.
Even though the government is trying to stabilize the value of the peso, I am concerned that failing consumer confidence will undermine the government's efforts. To my knowledge, residents have made fervent efforts to collect US dollars for over a year because of the money they can exchange those dollars for (most goods can't be bought with US dollars in Argentina, so they must be exchanged) - on the blue market last February, one dollar could be exchanged for 7 pesos; now, one dollar can be exchanged for 13. Argentines don't want dollars, but they realize that if the peso continues to weaken, buying dollars now and selling them in the future will profit them. These efforts won't lessen the pressure on the peso, but they can help some Argentines deal with inflation better. Unfortunately, the government doesn't seem to have faith in its ability to control the situation - in an article published in Clarin (an Argentine newspaper), the mayor of Buenos Aires said that the government "doesn't know what's going to happen tomorrow" and that a lot of efforts are being improvised. (Article in Spanish) http://www.clarin.com/politica/Macri-saben-va-pasar-manana_0_1073293138.html
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