Argentine peso strengthens on optimism over IMF talks

BUENOS AIRES (Reuters) - The Argentine peso closed 2.9 percent stronger on Thursday, reflecting investor optimism that the recession-hit country will strike a new standby financing agreement with the International Monetary Fund aimed at guaranteeing government solvency.

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The local currency ARS=RASL traded at 38.25 to the dollar at the end of the day. It has lost about half its value this year as investors have worried about whether Argentina could meet its debt obligations next year, prompting the government to seek support from the IMF.

An IMF spokesman said on Thursday that “important progress” was being made in talks between the multilateral lender and the government to strengthen June’s $50 billion standby deal.

Sky-high interest rates have siphoned growth in the recession-hit country, whose gross domestic product shrank 4.2 percent in the second quarter compared with the same period last year.

Argentina’s unemployment rate also rose to 9.6 percent in the second quarter, up from 9.1 percent from the previous quarter, government statistics agency Indec said on Thursday.

Investors said the peso got a boost from strong demand by foreign investors for a sale of government debt on Wednesday. An estimated $950 million of short-term Treasury notes were sold to foreign investors, traders said. The notes were issued with an interest rate of almost 50 percent.

The local Merval stock index .MERV also closed 4.3 percent higher, its strongest level since February.

The peso sell-off started in May, driven by high inflation and doubts about the central bank’s ability to pay its growing short-term ‘Lebac’ debt. The economy has since slipped into recession, with inflation at more than 34 percent in the 12 months through August.

Last month, President Mauricio Macri was forced to re-negotiate the IMF deal, offering policies aimed at erasing the country’s fiscal deficit next year in exchange for quicker-than-planned IMF cash disbursements.

This year’s deficit is expected by his administration at 2.6 percent of gross domestic product. On Monday, the government unveiled its 2019 budget proposal, offering spending cuts and tax hikes on exports as the way to reach fiscal equilibrium.

“There continues to be a demand for domestic assets, as international investors believe in the combination of ‘IMF II’ and the new budget,” Gustavo Ber, economist at Buenos Aires consultancy Estudio Ber said.

Additional reporting by Gabriel Burin, writing by Hugh Bronstein; Editing by Marguerita Choy and Rosalba O’Brien