(Bloomberg) -- President Javier Milei achieved something in the past year that many considered impossible: He made Argentines fall out of love with the dollar -- for now, at least.
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For decades, Milei's countrymen have preferred the US currency over the Argentine peso, the result of a never-ending series of inflation spikes that wiped out much of their local savings. So strong was demand for dollars among Argentines that they became a top holder of the greenback, only surpassed by Americans and Russians, according to estimates by economists and former central bank officials.
But things have changed since Milei took office in December 2023. His government maintained currency controls and cut spending, turning the budget deficit into a surplus and thus removing the need for Argentina's central bank to keep printing pesos.
Since then, the amount of pesos in circulation has dropped, and demand for dollars has weakened. The gap between the official peso exchange rate and that on the parallel market is narrowing, hitting less than 10% this week after widening to more than 200% before Milei came to power. The peso "ceased to be excrement," economist Andres Borenstein said, referencing a comment by Milei, who had described the local currency as such during the campaign.
Over time, the gap could shrink further, potentially allowing Milei to remove restrictions around foreign exchange, which prevent Argentines from buying dollars in the official market or sending them abroad. "This brings us a little closer each day to the definitive exit of capital controls, an aberration that never should have happened, and that with us, will end next year and forever," Milei said in a televised address Tuesday to mark his first year in office.
Unorthodox Methods
Further convergence between the different exchange rates could allow Argentina's central bank to recover some reserves. Boosting those reserves is considered a key step by analysts to lift exchange controls.
To get closer to that goal, the government used some unorthodox tools.