Argentina peso slumps as US fails to dispel devaluation fear

A slump in Argentina’s peso accelerated Friday even after the United States said it continued to buy the currency, stoking doubts that the Donald Trump administration’s US$20-billion rescue will be able to prevent President Javier Milei from ushering in another painful devaluation.

US Treasury Secretary Scott Bessent’s announcement that the US swooped in on Thursday to buy the peso in the parallel market – as well as the official one – did little to bolster the currency, which tumbled as much as 5.2 percent to 1,475 pesos to the US dollar, just five pesos off its record low. It closed at 1,450. At the same time, the currency dropped as much as 3.7 percent at the parallel rate. The effect was similar in the bond market, where prices jumped temporarily Friday only then to tumble back down.

The moves show how much Washington’s unusual effort to prop up Argentina’s markets ahead of this month’s legislative elections has been undercut by speculation Milei will be forced to let the peso tumble again afterward. Confidence in the United States was also damaged by Trump’s threat to rescind the aid if Milei suffers a setback at the polls – though it wasn’t immediately clear which election he was referring to. 

“Intervention has not been enough to prevent a rise in both the official and parallel exchange rates,” said Juan Sola, an economist at Banctrust. “Next week, we’ll likely see increased pressure, with the official dollar approaching the band’s ceiling, unless the Treasury increases its intervention.”

The US intervention was aimed at halting an escalating sell-off that was unleashed by the defeat for Milei’s party in last month’s provincial elections. The fear is that Milei’s administration will now lose the midterms on October 26, undercutting his ability to continue overhauling the economy.

Before the US intervened, Argentina’s government was selling dollars to defend the peso, eating up its reserves and contributing to periodic spikes in local interest rates as pesos were pulled out of the financial system.

The US Treasury secretary has said he sees the currency as “undervalued,” despite the locals’ views, and the administration has defended its aid as a way to help an ideological ally. 

Bessent’s post on X Friday marks the first time he’s disclosed such an intervention by buying at the parallel rate in the so-called blue chip swap market. The US Treasury also bought pesos at the official exchange rate on Thursday, adding to previous purchases. 

While the official rate is obtained at banks, Argentines use a series of unofficial rates – some legal and others not – for financial and cash transactions, respectively. Locals increasingly rely on the parallel rates when the peso is under currency controls or perceived to be overvalued.

The US Treasury “goes where it’s needed. And if you want to be optimistic, it shows the strength of the US commitment to Argentina,” said Walter Stoeppelwerth, chief investment officer at local brokerage Grit Capital Group. “The economic team insists that the market underestimates the level of commitment.”

Bessent previously announced that the US is preparing to extend a US$20-billion swap line to Argentina, although details remain scarce. Separately, the US Treasury is working on a US$20-billion facility from the private sector that would complement the currency swap. 

Meanwhile, short term interest rates continued to fall, with the overnight collateralised peso repo rate – known locally as caución – dropping to around 53 percent on Friday from more than 100 percent in the previous session. Borrowing costs are down for a second day after the government failed to roll over more than half of the local currency debt coming due this week, pushing a fresh supply of pesos into the market. 

As part of the effort to prop up the Argentine currency, Citigroup Inc sold pesos to the Federal Reserve on Thursday, according to people familiar with the matter. Banco Santander SA has also continued to buy pesos in Argentina’s local market on behalf of the Treasury, another person with direct knowledge of the matter said. It wasn’t clear how much was bought or sold by either institution to date.