Analysis-Argentina's FX gamble reaps early wins. Now for the hard part

By Rodrigo Campos and Miguel Lo Bianco

NEW YORK/BUENOS AIRES (Reuters) - Argentina's libertarian President Javier Milei rolled the dice this week on a major economic swerve, tearing down currency controls that had been in place for almost six years to protect the peso and avert an outflow of dollars.

So far his gamble is paying off.

The country's long-suffering peso weakened more than 10% on Monday before stabilizing in the middle of a wide new trading band that replaced a tightly-controlled currency peg, but avoided the more messy and chaotic crash that some had feared.

The faster-than-expected lifting of FX controls - long promised by Milei and sought by investors - has got some on Wall Street waxing lyrical about the South American nation emerging from years of economic tumult, overspending and market distortion.

Milei "is moving full speed ahead toward cleaning up Argentina's decades-old macroeconomic mess," investment bank UBS wrote, heralding the lowering of controls and a linked $20 billion deal with the International Monetary Fund.

"The elimination of capital controls, and the strengthening of the fiscal anchor, have all surpassed even the rosiest analyst expectations."

Milei, however, faces challenges ahead: getting sticky inflation down further, rebuilding foreign currency reserves that were deep in the red on a net basis, and winning over regular Argentines to even more austerity.

The IMF deal, under which $12 billion was disbursed up front on Tuesday, will bolster central bank reserves. But the country will need to build up some $4 billion on its own this year. Its reserve accumulation suffered a setback in recent months as the central bank sold dollars to protect an under-pressure peso.

Meanwhile, inflation that has come down sharply since Milei took office at the end of 2023, has proven stubborn above 2% each month. It jumped in February and could go higher after the abrupt weakening of the peso this week.

RUSH TO BUY DOLLARS?

On the streets of Buenos Aires, many regular Argentines were still wary about the peso, which has struggled for decades due to regular fiscal deficits, inflation and a lack of confidence among savers who have been burned by repeat currency crises.

"With all this talk about allowing a flotation, a supposedly free-floating dollar, well, it won't last long," said 61-year-old Gabriel Dome, who predicted people would try to hoard dollars now that strict limits were lifted.

"People will rush to buy whatever they can and there will be a shortage of dollars."