Argentina postpones currency trading

Currency trading, which was suspended on 21 December as the country's financial crisis gathered pace, had been due to resume on Wednesday.

The delay is sure to further undermine investor confidence in the dual exchange rate system unveiled as a replacement for the ten-year-old peso-dollar link at the weekend.

The reopening of the foreign exchange markets is expected to put the new currency system, which many analysts view as fatally flawed, to the test.

Exchange rate turmoil ahead?

The new system fixes the peso at a rate of 1.4 to the dollar for international transactions, down from its old one-to-one conversion rate, while allowing it to float freely on the domestic market.

It is designed to make Argentine exports more competitive on international markets, while preventing the price of imported goods from rising in an inflationary spiral.

But analysts fear that false invoicing by both importers and exporters will make the system untenable.

This would force the Argentine government to devalue the official peso exchange rate further, potentially fuelling inflation.

"If prices spike up it could set in place a vicious circle of inflation forcing the currency further and further down," said Philip Poole, head of emerging market research at ING Barings.

The devaluation of the official peso-dollar exchange rate has already led to an increase in some retail prices.

Businesses in trouble

A proposed tax on oil exports aimed at compensating banks for an enforced conversion into pesos of most private dollar-denominated debt at the old rate of 1:1 has also shaken investors' confidence.

The private debt-conversion scheme, like the dual exchange rate system, is a populist measure designed to cushion the Argentine people from inflation and a sharp rise in debt servicing costs.

Interim president Eduardo Duhalde's policies have helped to avert a recurrence of last month's violent street protests, during which 27 people died.

But with many local companies still bearing dollar denominated debt and now generating revenues only in heavily devalued pesos, corporate Argentina is set to feel the pinch.

"We believe that (the new policies) will deepen the economic crisis, heighten political risk, and put a recovery further out of reach," investment bank Credit Suisse First Boston wrote in a research note.

Cash withdrawal limits eased

Earlier on Tuesday, deputy economy minister Jorge Todesca told local radio that he plans to raise a monthly limit on private cash withdrawals from $1,000 to $1,500 for some account holders, without providing further details.

The cash withdrawal curbs, imposed last month, are designed to prevent a run on the Argentine banking system amid growing public alarm over the country's economic crisis.

But by increasing the financial hardship facing the Argentine people, the banking restrictions are helping to stoke popular protests which have already forced two interim governments to step down.

They have also exacerbated Argentina's economic contraction by limiting ordinary citizens' ability to buy goods and services.