August 15, 2018 / 7:00 PM / 3 months ago

UPDATE 4-Argentina central bank sells reserves as peso hits record low

(Adds July inflation figure, paragraphs 4-6)

BUENOS AIRES, Aug 15 (Reuters) - Argentina’s central bank on Wednesday sold $781 million in reserves into the foreign exchange market in a bid to stop a slide of the peso currency, which hit a record low because of inflation concerns and poor emerging markets sentiment globally.

The peso fell as much as 2 percent to touch a record low 30.50 per U.S. dollar, as continued jitters about Turkey’s lira currency sparked a selloff in emerging market assets.

It later rebounded as the central bank sold foreign currency reserves in three separate auctions at average prices of 30.03, 29.81, and 29.96 pesos per dollar. In the spot market, the peso closed down 0.4 percent at 30 per U.S. dollar.

Argentina’s economy has been one of the hardest hit by growing risk aversion. Global investors are worried about high inflation that hit 31.2 percent in July, according to government data released on Wednesday, and a large portion of debt denominated in dollars.

Analysts now expect Argentina’s economy to contract this year, reversing the high expectations they had early in 2018 after a steady stream of bad news including a sharp weakening of the currency and a drought that hit the main cash crop, soy.

Earlier this year, Argentina pledged to speed up deficit cuts and keep inflation below 32 percent as part of a $50 billion credit line with the International Monetary Fund (IMF). Inflation above 32 percent would require a consultation with the Fund’s executive board, which could withhold disbursements.

The latest bout of emerging market turbulence prompted the central bank on Monday to raise its benchmark interest rate to 45 percent from 40 percent, and announce a plan to speed up the reduction of the outstanding stock of short-term debt known as Lebacs.

That plan was welcomed by the IMF, but traders said the reduction in Lebacs would leave more pesos in the economy, pressuring the exchange rate and inflation. The monetary authority lowered the interest rate on short-term debt to 45.04 percent from 46.5 percent in a Tuesday auction, selling 201.7 billion pesos ($6.75 billion).

“The quicker unwinding of Lebacs will hurt in terms of a higher dollar and lower reserves this year, but it gets rid of a source of instability,” Federico Furiase, the director of economic consultancy Estudio Eco Go, wrote on Twitter. (Reporting by Jorge Otaola y Walter Bianchi, writing by Hugh Bronstein and Luc Cohen Editing by David Gregorio and Steve Orlofsky)

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