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  • Mathieu Provencher

Argentina's ARS bites the dust

Hi Guys! New development for Argentina: the government "decided" to stop protecting the value of their currency last week, which lead to a significant depreciation of the Argentinean Peso, also called ARS (why would anyone who knows English choose that name... seriously!). Can you guys remember how governments can make their currencies stronger or weaker? They tried both capital controls and currency operations and are now forced to stop these.


A person answered:

Capital controls are ways to regulate the amount/value of a currency. In the Argentinian case, they tried holding back USD and forcing a fixed price; making the populace use ARS. The idea was for the people to use ARS willingly, giving it value, reducing its scarcity within the country and replacing the USD as the "to-go" currency in the country. However, the opposite happened; people flocked towards the USD instead of the ARS as they deemed it safer (generating black market on the process), the ARS value diminished and the Government realized they had to stop before the ARS became worthless (I still think ARS sounds pretty funny, almost like the Vietnamese Dong - VND)


I replied:

Also, an increase in domestic interest rates can lead to the appreciation of your currency, but it's not because its availability will be lower. Higher interest rates might bring international savers in your country, which means that at least some of them (depending on your banking sector) will purchase your currency to save in your banks... this increases the demand for the currency and leads to its appreciation.

Talking about interest rates, did you guys hear that both Turkey and South Africa increased their base interest rates in order to appreciate their currencies and reduce their level of inflation? Turkey's central bank went all out and increased its base rate by approximately 5% (from 7.75% to 12.5%, depending which interest rates you look at) two days ago, which is a BIG deal. I explained earlier how this would appreciate the local currency, which it did with the "Lira".


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