(Adds analyst quote, IMF negotiations, context, economic background)
By Hugh Bronstein and Jorge Otaola
BUENOS AIRES, Sept 21 (Reuters) - Argentina’s peso strengthened for the third straight day on Friday, driven by optimism that the government would sign a revised financing deal with the International Monetary Fund to include faster cash disbursements and stricter fiscal measures.
The currency rose 1.06 percent to 37.85 per U.S. dollar, without the benefit of intervention by the central bank, which has been holding regular dollar auctions to support the battered local currency, traders said.
The currency has benefited instead from dollar inflows as investors piled into Treasury notes offered this week at interest rates about 50 percent. The peso has strengthened 6.32 percent since Monday, but remains more than 50 percent lower so far this year.
The IMF and Argentina made “important progress” over recent days toward a new standby agreement that could be considered soon by the IMF’s board, a Fund spokesman said on Thursday.
The peso sell-off started in May, driven by high inflation and doubts about the central bank’s ability to roll over its growing stock of short-term ‘Lebac’ notes. The economy has since slipped into recession, with inflation at more than 34 percent.
Argentine authorities have agreed with the IMF to reduce the amount of outstanding Lebac debt gradually and to slash the primary fiscal deficit to zero in 2019 from an estimated 2.6 percent of gross domestic product in this year.
Last month, President Mauricio Macri was forced by the sinking peso to renegotiate the $50 billion IMF standby deal he signed in June. On Monday, the government unveiled its 2019 budget proposal, offering spending cuts and tax hikes on exports as the way to reach fiscal equilibrium.
While giving an immediate boost to the currency, 50 percent interest rates on short-term government debt will prove costly over the long run. With additional government spending cuts expected to hit an already shrinking economy blighted by high inflation, the currency remains vulnerable, some economists say.
“The peso has definitely not touched bottom,” said Martin Guzman, an economist at Columbia University Business School.
“Inflation will lead to further depreciation of the nominal exchange rate. The fiscal budget presented by the government assumes that in 2019 the nominal exchange rate will stabilize at the current value, but that’s unrealistic,” Guzman said.
Additional reporting by Walter Bianchi; Editing by Dan Grebler