Argentine peso holds steady, but stability seen fragile

BUENOS AIRES Tue Feb 11, 2014 3:15pm EST

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BUENOS AIRES Feb 11 (Reuters) - Argentina's peso took a breather from its rollercoaster ride in recent days, steadying on policy changes that boosted dollar supply in local markets, though analysts warned the respite was likely to be temporary.

The official peso closed on Tuesday at 7.81 to the U.S. dollar, and has risen around 4 percent since late January's devaluation, when it lost 12 percent in one day.

The parallel black market peso has followed a similar pattern, trading at around 11.7 to the dollar on Tuesday, considerably stronger than the 13.1 it hit on Jan. 23. In a rainy street in central Buenos Aires, the few customers approaching the illicit exchange traders looked largely to be tourists.

The Argentine government, which has been dipping into its dwindling reserves to bolster the currency, is hoping a combination of policy tweaks and business cash can keep the peso steady until an expected flow of funds in March from crop sales.

Meanwhile, it continues to intervene and the reserves are still falling, down to $27.74 billion as of Monday evening.

That will cover less than five months of imports, said Capital Economics economist David Rees, adding that at its current rate the government would burn through to the widely suggested minimum level of three months of import coverage by May.

"The bottom line is that Argentina remains in the grip of a low-burning balance of payments crisis," he said.

Last week, the central bank limited the net foreign currency positions of local banks, helping to push more dollars into the market. More good news for the government came from the cereal firm industry, which promised to liquidate $2 billion into the local market in February.

The central bank has also allowed interest rates on some peso-denominated notes to rise, while the loosening of limits on purchasing dollars for savings had taken some pressure off the peso, said Credit Suisse in a note to clients.

In March, when the soy harvest begins in earnest in Argentina, farmers will re-start sales and bring in more cash to the world's No.3 soybean exporter and top soymeal supplier.

But later in 2014, once the harvest inflows subside, the pressure would be on again, Credit Suisse said.

"Despite some positive aspects of the policy response following January's devaluation, Argentina's current economic situation is unsustainable in our view," it said, adding that it expects another devaluation in the fourth quarter.

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