UPDATE 2-Venezuela sets new rate for bolivar versus dollar

* New foreign exchange system launched on Wednesday

* Aimed at stopping depreciation of bolivar currency (Adds analyst, details, background)

By Ana Isabel Martinez

CARACAS, June 9 (Reuters) - Venezuela's bolivar currency will trade in a band of 4.2 to 5.4 versus the U.S. dollar, traders said on Wednesday, the first day of a new foreign exchange market.

The OPEC member nation's new system is the latest attempt by the socialist government of President Hugo Chavez to stop a depreciation of its currency and stem capital flight.

The market replaces an unregulated, free-floating exchange known as the parallel market where the bolivar VEF= had tumbled in value to more than 8 against the dollar this year.

Traders in Caracas calculated the price band after the central bank released a list of reference prices for internationally traded Venezuelan bonds. The new system uses those bonds to establish a daily price band for the bolivar.

Venezuela already has strict exchange controls aimed at keeping capital onshore and subsidizing some imports. Since taking office 11 years ago, Chavez has increased the state's economic role via regulation and widespread nationalizations.

He faces legislative elections in September while battling a deep recession, high inflation and plunging bond prices, worsened by uncertainty about the currency. For details, see [ID:nN21147089]

Patrick Esteruelas, Latin America analyst at Eurasia Group, said the market was likely to be beset by problems from the start due to the government's apparent unwillingness and likely inability to supply enough dollars to meet pent-up demand.

"The new system is therefore likely to be a poor substitute for the old parallel market and will result in growing foreign exchange and price distortions that will further undermine growth," Esteruelas wrote in a research note.

Critics say Chavez's aggressive stance toward businesses and inflationary policies drives demand for dollars, weakening the bolivar and fueling further price rises in the country, which relies on imports for most consumer items.

His supporters and the government disagree and say much of the demand for dollars is speculative and that the new system will weed out traders just looking to make quick profits. (Writing by Daniel Wallis; Editing by Kenneth Barry)