After spending more than $4.5 billion in scarce hard currency defending the peso last year, the central bank allowed the currency to plummet against the dollar Wednesday and Thursday in two brief devaluations that weakened the peso about 11% during those two days. The peso closed at 7.75 to the dollar Thursday following its biggest devaluation since early 2002, when the government of the time ended a currency system that pegged the peso to the dollar at a one-to-one parity. The peso also weakened on the black market to close at about 13.10 to the dollar, compared with 12.15 on Wednesday.
The central bank spent at least $100 million to limit the drop in the peso Thursday, and its hard currency reserves finished the day at a more than seven year low of $29.3 billion. The steady drop in reserves from a peak of $52.6 billion in early 2011 has sparked concerns that Argentina might struggle to make debt payments this year and in 2015.
The devaluation and falling reserves raise the specter of a deep economic crisis with inflation already believed to be running above 25% before the devaluation, the product of years of rapid increases in government spending financed in part by money printing. A weaker currency can aggravate inflation by reducing consumers’ purchasing power and pushing up the cost of imported goods.