(Adds credit and economic context)
BUENOS AIRES, Oct 17 (Reuters) - Argentina will launch a new two-year sovereign bond on Oct. 23 for up to $1 billion, denominated in U.S. dollars and paid in the local peso currency, the Economy Ministry said in a statement on Friday.
The new bond will have an annual coupon of 1.75 percent, the statement said, adding that the minimum amount to be launched on Thursday will be $500 million.
The obligations will be paid at the country's official exchange rate, it said.
"This bond is exclusively for the domestic market. The buyers will be local insurance companies and other institutional investors," said Alejo Costa, chief strategist at local investment bank Puente.
"The government is trying to show it can issue at a low rate. It is also trying to mop up some excess liquidity," he added. "The bond is denominated in dollars but the government will receive pesos and pay out in pesos, according to the exchange rate."
The issue comes at a difficult time for Latin America's No. 3 economy. The government defaulted on it global bonds in July after spurning a U.S. court decision ordering full repayment to "holdout" hedge funds that declined to participate in a pair of restructurings that followed Argentina's 2002 debt crisis.
Investors who exchanged bonds in 2005 and 2010 were paid less than 30 cents on the dollar.
Inflation is expected by private economists to end this year at about 40 percent, one of the world's highest rates, while heavy currency and trade controls weigh on economic activity. (Reporting by Eliana Raszewski and Hugh Bronstein; Editing by Gunna Dickson, Diane Craft and Ken Wills)