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The almighty dollar

When the economy gets tough, Argentines flock to the dollar.

Thus began the fall of the Argentine currency in those post-war years, and the superior strength of the dollar was cinched after the oil shocks of the 1970s. Hyperinflation of Argentine currency in the following decade reached 20,000 percent. After the enforced stability of the 1990s — when the peso was pegged to the dollar — it collapsed again with the rest of the Argentine economy in 2001.

Argentina's government seems like it's finally had enough of “dolarizacion,” as the predominance of the dollar is referred to here. So officials are trying to institute a “System of Payment in Local Currencies” to eliminate the use of dollars in transactions with its largest trading partner, Brazil. The government would therefore reduce its dependency on dollars, which it doesn't have a whole lot of — currently about $47 billion in reserves. Imports from Brazil are currently worth about a fifth of that amount.

It remains to be seen whether the purge will work. “The consensus of people working in the negotiations between Argentina and Brazil are saying that the central banks are failing in the attempt, because there is a lot of memory,” said analyst Jose Luis Espert. “It is very difficult to change the culture of the entrepreneurs, who are making everyday transactions in dollars.”

Even domestic transactions often take place in dollars in Argentina. For a range of purchases — from plane tickets bought through travel agents to cars and houses — Argentines must carry hard, green bills.

When it comes to international trade, though, the dollar dominance is even more pronounced.

But one country has already managed to push through a non-dollar agreement with Argentina. A currency swap with China made Argentina the first Latin American country to buy Chinese yuan — $10 billion worth — without any actual dollars in the middle.

Jose Luis Espert says that, contrary to appearances, the yuan swap might actually just be a tactic to inject more dollars into the Argentine economy. Since Argentina's economic unreliability prevents it from going directly to the U.S. Federal Reserve with pesos, one of the only ways for the government to buy large amounts of dollars is with a third currency. Hence, the yuan, Espert said.

Which would mean that Chinese yuan and Brazilian reals notwithstanding, dollars are still the gold standard in the Argentine economy.

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