Argentina’s Peso Gains Momentum

By Walter Bianchi

BUENOS AIRES (Reuters) – Argentina’s peso is gaining ground despite being freed from years of currency controls intended to prevent its decline, alleviating concerns about resurgent inflation.

This month, the South American country eased most restrictions in place since 2019, which had pegged the peso and limited access to currency markets, distorting trade and investment flows. This led to a steep drop of over 10% in the currency last week, heightening fears that inflation, which had been slowing under the stringent measures of libertarian president Javier Milei, would rise again.

However, the government’s commitment to achieving a fiscal surplus, assurances not to intervene in the FX market until the peso strengthens, an influx of dollars from grain exports, and tight local monetary conditions have since supported the exchange rate.

The peso has rebounded to near pre-control levels, surprising market analysts and easing fears that depreciation would trigger inflation, which has reduced to 56% year-on-year from nearly 300% in early 2024.

Peso futures have seen a significant uptick after the initial declines, although predictions still indicate that the currency may weaken throughout the year.

Economist Fausto Spotorno from OJF consultancy stated, “We now don’t expect an immediate impact on prices,” implying that increased competition and a low supply of pesos might counterbalance any inflation caused by a weaker currency.

Reuters spoke to six analysts who projected April inflation between 3% and 5%, a rise compared to recent months but still lower than previous forecasts above 5%.

Milei has prioritized controlling inflation, reducing the monthly rate from approximately 25% after he assumed office in late 2023. Yet, achieving 2% has been challenging, with a slight uptick to 3.7% in March.

The government also aims to replenish depleting foreign currency reserves as part of a newly finalized $20 billion loan agreement with the International Monetary Fund (IMF).

Agustín Etchebarne of the Libertad y Progreso Foundation believes that the government’s stringent monetary policy and focus on a fiscal surplus will help decrease inflation in the coming months. He asserts, “With the significant economic adjustment, a very strong fiscal surplus, and fewer and fewer pesos, inflation will drop in two or three months, and next year inflation will be very low in Argentina.”