What advantage can be mention between Argentina and U.S.A. currency exchange?

Question

I need to know what advantages and disadvantages can be present in currency exchange between the U.S. dollar and the Argentina peso.

Answer 1

http://en.wikipedia.org/wiki/Argentine_peso

Peso Convertible, 1992–present

The current peso replaced the austral at a rate of 1 peso = 10,000 australes. It was also referred to as peso convertible since the international exchange rate was fixed by the Central Bank at 1 peso = 1 U.S. dollar and for every peso convertible circulating, there was a U.S. dollar in the Central Bank's foreign currency reserves. The end result of this replacement was that one peso convertible would be worth 10,000,000,000,000 (1013) pesos moneda nacional. However, after the economic debacle of 2001, the fixed exchange rate system was abandoned.

Since January 2002, the exchange rate fluctuated, up to a peak of four pesos to one dollar (that is, a 75% devaluation). The exports boom then produced a massive inflow of dollars into the Argentine economy, which helped lower their price. On the other hand, the current administration has publicly acknowledged a strategy of keeping the exchange rate between 2.90 to 3.10 pesos per U.S. dollar, in order to maintain the competitiveness of exports and encourage import substitution by local industries. When necessary, the Central Bank emits pesos and buys dollars in the free market (sometimes large amounts, in the order of 10 to 100 million USD per day) to keep the dollar price from dropping, and had amassed over 27,000 million USD in reserves before the 9,810 million USD payment to the IMF in January 2006.

Note that the highest valued peso note is the AR$100, worth only about US$33. Prices in Argentina are lower than those in the United States in terms of purchasing power parity, so there is little need for higher valued notes.

http://en.wikipedia.org/wiki/Argentine_Currency_Board

The Argentine Currency Board pegged the Argentine peso to the U.S. dollar between 1991 and 2002 in an attempt to eliminate hyperinflation and stimulate economic growth. While it initially met with considerable success, the board's actions ultimately failed because of significant flaws in policy implementation.

For almost twenty years, up to the end of the 1980s, Argentina experienced hyperinflation, poor or negative GDP growth, a severe lack of confidence in the national government and the Central Bank, and low levels of capital investment. After eight currency crises since the early 1970s, inflation peaked in 1989, reaching 3,000 % per annum. Per capita GDP was 10% lower than in 1980, social indicators deteriorated seriously, and the fiscal deficit reached 7.6% of GDP.

To a large extent, the main reason behind this long period of hyperinflation was unsustainable growth of the money supply to finance the large fiscal deficits maintained by successive governments. Since Argentina could not participate meaningfully in world capital markets given the great investment risk it posed, the only course available was the financing of these fiscal deficits by monetizing them. This meant that the government levied an inflation tax to pay for the fiscal deficits, which in turn contributed to stalling growth.

Another reason for the instability of the Argentine currency was the fragility of domestic financial institutions. The Argentine banking crisis of 1980 underlined this point, as the Central Bank moved to confiscate the deposits of commercial banks to overcome a liquidity crunch.

There were also external factors that further triggered the currency crisis, such as interest rate fluctuations. In the early 1980s, for example, the United States imposed tight monetary discipline upon its own institutions, which made it more expensive to borrow money because banks had fewer reserves. At other times, less restrictive monetary policy lowered interest rates in the developed economies, resulting in capital flows to developing countries, which produced real exchange rate appreciation, ballooning current account deficits, and, in many cases, full-blown currency crises.

[edit] The currency board

In July 1989, President Raúl Alfonsín resigned, and President elect Carlos Menem took office six months in advance. His early attempts to stabilize inflation failed, resulting in further depreciation of the peso and a serious reduction in the Central Bank's foreign currency reserves.

In April 1991, Menem reverted the country's policies according to ideas of Washington Consensus to what was later to be called economic neo-liberalism. This system involved a program of massive privatization and labor deregulation laws, which encouraged foreign investment and infused the country with cash to finance its fiscal deficits. However, the linchpin of the new system was the introduction of the Convertibility System.

At the time, there was much debate in Argentina and abroad about how to control inflation and build confidence in local currencies in order to foster investment and growth. There were three options of exchange rate management available to any government: a floating exchange rate, a super-fixed exchange rate (including the possible use of a currency board), or a hybrid system. The hybrid system consisted of various levels of control over exchange rates, and it was discredited in the early 1990s when empirical evidence from several currency crises showed that, in a world of high capital mobility, a semi-fixed exchange rate was very unstable, because it allowed a country with poor monetary policy to exercise too much discretionary power. The consequence was that a government had to choose between either fixed or fully floating exchange rate systems.

Before the implementation of the currency board there was much debate over which currency or currencies to peg the peso against. In the view of many economists, the peso should have been pegged to a basket of currencies from the countries that were Argentina's major trading partners. Others argued that the peso should be pegged to the U.S. dollar because it would provide simplicity of understanding, the highest degree of safety, greater international credibility, and the promise of increased trade with the United States. The latter argument won the day, with both positive and negative consequences.

Argentina's currency board established a fixed pegging of one-to-one parity between the peso and the U.S. dollar. It also guaranteed full convertibility of pesos into U.S. dollars. The government hoped to establish local and international credibility in the peg and to limit the amount of local control over monetary and fiscal policy. The currency board regime intended to stabilize the peso, encourage both foreign and local investment, and foster sustained economic growth.

[edit] Flaws in implementation

The main qualities of an orthodox currency board are:

* A currency board maintains absolute, unlimited convertibility between its notes and coins and the currency against which they are pegged, at a fixed rate of exchange, with no restrictions on current-account or capital-account transactions.
* A currency board's foreign currency reserves must be sufficient to ensure that all holders of its notes and coins can convert them into the reserve currency (usually 110–115%).
* A currency board only earns profit from interest on reserves (less the expense of note-issuing), and does not engage in forward-exchange transactions.
* A currency board has no discretionary powers to effect monetary policy and does not lend to the government. Governments cannot print money, and can only tax or borrow to meet their spending commitments.
* A currency board does not act as a lender of last resort to commercial banks, and does not regulate reserve requirements.
* A currency board does not attempt to manipulate interest rates by establishing a discount rate like a central bank. The peg with the foreign currency tends to keep interest rates and inflation very closely aligned to those in the country against whose currency the peg is fixed.

The Argentine currency board violated all these rules at one time or another, except that of a fixed exchange rate. Full convertibility with the U.S. dollar became jeopardized upon implementation of exchange rate controls that provided a preferential exchange rate for exports. The currency board was allowed to hold up to one-third of its dollar-denominated reserves in the form of bonds issued by the government of Argentina. It acted as lender of last resort and regulated reserve requirements for commercial banks. And it engaged in monetary policy activities. The impact of all this was to reduce the credibility of the Argentine government's intent, and to put speculative pressure on the peso, despite the peg.