Monday, September 15, 2014

Argentina’s US Dollar Reserve Is Declining To Dangerously Low Levels

by Big Picture

Gold, Inflation/Deflation, Sprout Money

Christina Fernandez Kirchner

President Christina Fernandez Kirchner


Argentina has announced new measures to reduce the demand for US Dollars on the official foreign exchange market. Whereas the purchase of dollars was limited to people with a monthly income of 7,200 pesos per month, this amount has been increased to 8,800 pesos per month which means that Argentina is once again forbidding its ‘poorer’ citizens to hedge against the ever-increasing inflation in Argentina.
USDARS Exchange Rate

The USD/ARS exchange rate

Source: Yahoo Finance

This move was necessary to safeguard the dollar reserve of the Argentinean central bank, as according to the Wall Street Journal , in excess of $1.5B has been drained from the central bank by the Argentinean citizens. As the government devaluated the currency by 20% earlier this year, a lot of people don’t trust the government anymore and with an accelerated level of buying the US Dollar (in the first 4 days of September, Argentinean citizens bought $147M in US Dollar which is a clear acceleration from the $260M in the month of August). The central bank is doing everything it can to keep the official exchange rate low, as on low-volume days, traders are able to see some obvious dollar-dumping on the market by the central bank.

At this point in time, one US Dollar costs about 10 Argentinean peso’s on the official market, but the exchange rate on the black market (which is firing on all cylinders as the people who don’t meet the minimum criteria also want to buy dollars) is closer to 14/15 peso’s per dollar. The main reason for this run to the dollar is the fact that the inflation rate in Argentina is approximately 40% which means the value of the Peso is going down the drain fast. Additionally, there still hasn’t been reached an agreement on the debt situation in the USA, which means Argentina technically has defaulted on a part of its debt.

Should the regulations become even tighter, the supply of US Dollars could dry up and the question will then be whether or not the Argentinean citizens would consider to buy precious metals as a safe haven.

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