Argentina’s “Blue Dollar” Leads Monetary Dance to Devaluation

EspañolIn recent days, the blue dollar (parallel) exchange rate in Argentina seems to have woken up after being asleep for a few weeks. While the exchange rate was slowly climbing, it surprisingly weakened to AR$11.30 per US dollar on May 19 (from AR$10.90), and closed that day at AR$11.70. In other words, it increased by 80 cents in just two days. Meanwhile, the official dollar closed on May 20 at AR$8.07 per dollar.

The sudden increase in the parallel exchange rate in Argentina is nothing new, and is commonly interpreted as “an increase in the value of the dollar.” But the question is: is it really the dollar that’s going up?

Analyzing an exchange rate means examining the relationship between two currencies — in this case, the dollar and the peso. What seems to be happening is more likely that the demand for the peso is dropping due to high inflation in the country. Therefore, if the peso loses value because of inflation, the result in relative terms is that the dollar goes up.

But it is not entirely correct to say that “the dollar is going up,” because what is actually happening is a loss of purchasing power of the peso. In short, the dollar has not appreciated in value, the peso has depreciated as a result of inflation.

Unfortunately, Argentina has broken records with inflation throughout its history, so this phenomenon of exchange rate gaps between the parallel and the official is not new to the country. For example, in late 1958 and early 1959 — the currency was still the peso moneda nacional ($mn) — there was a gap of more than 250 percent between the official and parallel exchange rates. This led Arturo Frondizi to devalue the official exchange rate, making it conform with the parallel. If we look at the period between the second half of 1966 and early 1967 (still under the peso moneda nacional), we also observe how the parallel dollar began to accelerate while the official slowed down. This ended the same way, when in March 1967, the military government devalued the official exchange rate to match the parallel rate.

Another example comes in mid-1972 (now under the peso ley), when a fixed exchange rate policy was adopted as the parallel fluctuated at a rate approximately 20 percent higher. In 1974, the parallel began to accelerate as the official dollar remained fixed until April of 1975, and only then began to catch up to the parallel. Keeping with tradition, the solution once again was to devalue, only this time there were several strong devaluations instead of just a single one to reach the parallel dollar. The gap reached nearly 300 percent.

Then, during the Alfonsín administration — when the national currency was the austral — the official and parallel exchange rates moved in tandem, although the latter always at a higher rate. This story also ended with devaluation, once the gap reached almost 100 percent.

The empirical evidence clearly shows that in this waltz, the parallel leads the way; the official dollar always following behind.

With the increase over the last few days, the gap has reached 45 percent — although it should be noted that in 2013 the gap reached nearly 80 percent. This last figure served as a warning to the government to bridge the gap, since history has shown us two very clear lessons: first, the devaluation will come, sooner or later, but it will inevitably happen; and second, devaluation occurs with increasingly smaller gaps, indicating that the population is becoming less tolerant of gaps between the official and parallel dollar.

According to the president’s Chief of Staff Jorge Capitanich, AR$8 per dollar represents an exchange rate of convergence. However, the reality is that the official dollar has already begun its devaluation, although those in charge have carried this out slowly. Of course the official dollar should still be much higher, and it remains close to AR$8 at the cost of losing reserves, although these are up now momentarily softened because of the dollars coming in from grain exports.

This disparity cannot last forever, and sooner or later the government will recognize that the real exchange rate is much higher than the one it tries to maintain. It’s not a whim. It is a simple recognition of the corrosive effects inflation has on the value of the national currency. This corrosion is the reason why throughout Argentina’s history, the dominant force in currency exchange has been the parallel dollar and not the official.

Translated by Guillermo Jimenez.

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