Venezuela government takes control of forex trade

CARACAS (Reuters) - Venezuela took control of foreign exchange trading on Tuesday by promising a band for dollar exchanges and banning brokerages from a "parallel" unofficial market where the bolivar currency has bombed since the start of this year.

President Hugo Chavez has ordered his economic team to take charge of the free-floating parallel market, where he blames speculators for driving down the bolivar and fueling sky-high inflation in the OPEC member.

Critics blame him, however, for the currency chaos in Venezuela, saying an ill-planned and multilayered system has distorted the market and created corruption, while socialist policies have crushed investment and production.

In a long-awaited press conference to explain the new rules, Central Bank President Nelson Merentes said international bond prices would be used as a reference to give transparency to a system run solely by the bank.

He said brokerages would be "totally" excluded from the new mechanism, thereby eliminating the impact of speculation while still letting market forces set prices.

"The market will now be set according to the values of the securities in the international market through a simple mathematical model, which produces a band with upper and lower limits," Merentes told a news conference.

"We want to find a stable, transparent and efficient system. We want to replace a degree of possible financial speculation with something that will become a routine procedure, normal trading of securities and foreign currency."

A senior government source told Reuters the new system would take effect in about two weeks.

The parallel market, where dozens of private brokerages had used a debt swap mechanism to sell dollars at a price well above the official rates of 2.6 and 4.3 bolivars per dollar, had been supplying currency for about half of the country's imports.

But the bolivar has plunged to more than 8.0 per dollar this month, fueling one of the world's highest inflation rates.

Analysts and market sources believe the band for the parallel dollar will probably be between 5.0-7.0 bolivars.

Market players were locked to the news conference, where Merentes appeared alongside Finance Minister Jorge Giordani and the stock market regulator. The television transmission from the presidential palace cut out several times.

"For many brokers, it is a life or death situation," wrote Russell Dallen, BBO Financial Market's capital markets chief.

"Investment banking, stock trading on the Caracas Bolsa -- much less IPOs (initial public offerings) -- are all but non-existent, and FX trading was their only profit-center."

Some economists have warned the new strategy may backfire and create a fourth, black market for dollars and possibly hasten another devaluation by the government next year. The bolivar was devalued from an official rate of 2.15 in January.

The system will now inevitably force sme people to turn to illegal means, such as depositing dollars in foreign bank accounts in exchange for bolivars in Venezuela, traders said.

The bolivar's woes are complicating a grim macroeconomic outlook for Venezuela which, despite its vast oil wealth, is predicted by analysts to be the only country in Latin America with negative growth this year.

Chavez blames inflation, which rose to a monthly high of more than 5 percent in April, and the bolivar's weakening on an "oligarchy" determined to cause him problems ahead of an assembly election this year and a presidential vote in 2012.

Many analysts, however, say the socialist president's incompetence in running the economy, including heavy-handed controls and nationalizations of private business, are to blame for Venezuela's poor economic health.