Argentina central bank speeds up FX sales to prop up peso

By Jorge Otaola

BUENOS AIRES (Reuters) - Argentina's central bank is being forced to sell dollars at an accelerated rate to prop up the peso amid rising global uncertainty, including questions over a new deal with the International Monetary Fund.

The bank, which has been battling for over a year to reverse a deep deficit in foreign currency reserves, sold off over half a billion dollars in the latest two rounds of interventions, breaking a six-week streak of net dollar purchases.

Argentina's government has won over markets and investors since libertarian President Javier Milei took office in late 2023 with a tough "zero deficit" austerity program, but rebuilding depleted reserves has been slow.

Milei is seeking a new IMF program to bolster state finances battered by years of overspending and deep fiscal deficits. However, key program details remain uncertain and the plan faces potential pushback in Congress.

That uncertainty has pressured the peso this year after a strong 2024, re-widening the gap between the tightly controlled official exchange rate and popular parallel rates used by many Argentines.

On Tuesday the official rate dipped to 1,068.5 per dollar while the black market rate hit 1,260 per dollar, with a gap of around 18%. That gap almost disappeared late last year, after widening to almost 200% in recent years.

"The market is showing uncertainty regarding the exchange rate pattern for the coming months, with parallel dollars in demand," said Juan Franco, chief economist at Grupo SBS.

"In addition we're seeing some pressure on the prices of dollar futures contracts, which show implied increases greater than the 1% monthly crawling peg (controlled devaluation) mandated by the government."

On Friday the bank sold $474 million, its second biggest single day of sales under Milei.

That was "one of the worst days of the Milei era," said Roberto Geretto, co-head portfolio manager of Adcap Asset Management in Buenos Aires. However, he suggested it could be a one-off event and that "a stumble is not a fall."

"This doesn't overshadow the fact that it has already purchased more than $3 billion this year, marking one of the best starts since records began. Therefore, what happened on Friday is unlikely to be the start of a new trend."

In a recent decree, the government said net foreign currency reserves were negative $11.2 billion when it took office in December 2023. A $7 billion improvement since then left reserves at around $4 billion in the red as of March 6.

In that decree, Milei preemptively promoted a new loan program with the IMF that would reduce Treasury debt with the central bank. The deal has not yet been agreed with the IMF, though the fund has said talks have been positive.

The government has pledged to eventually undo tight capital controls, which could be aided by new IMF funds. However, it needs to keep bringing down inflation, which has slid under Milei but remained over 2% monthly in recent months.

(Reporting by Jorge Otaola; Additional reporting by Hernan Nessi; Editing by Adam Jourdan and Richard Chang)