By Ryan Dubé and Silvina Frydlewsky

BUENOS AIRES -- When he ran for president of Argentina, Javier Milei compared the country's currency to excrement, telling Argentines to forget the peso and vowing to scrap it altogether.

Now Milei's government is using its precious few reserves of American dollars to buy pesos and prop up their value, a stark departure from his free-market overhaul of the country's economy. And he is asking for billions of dollars from the Trump administration to keep the peso from sliding.

The peso has become the Achilles' heel of Milei's radical takedown of Argentina's traditional economic policies. He has slashed spending, cut red tape and tamed inflation. But he has been unable to break from his predecessors' policies on the currency, hobbling his ability to complete his reforms and succeed in his free-market overhaul.

Milei can keep spending dollars to shore up the peso, a policy that keeps inflation in check. But in the long run, it discourages investment and keeps Argentina's potent export-driven farmers from selling more abroad and bringing in much-needed dollars.

The other option is to allow markets to set the price of the peso, much like the U.S. dollar, euro and most other major currencies. That would boost Argentina's reserves of foreign currency, which is crucial to absorbing economic shocks and repaying the country's billions of dollars in foreign debt.

But it would weaken the peso, send inflation higher and make middle-class Argentines feel poorer, politically risky in a country where big protests over rising costs have doomed presidencies before.

Many Argentines like a strong peso. Their savings go further as they import goods from China. Some jet off to Brazil or Miami for vacations. Already, Milei's policies and brash personality are wearing thin with the public, making any move on the peso less likely.

"The right thing to do from an economic point of view would be to let the peso float," said Martín Rapetti, an economist at the University of Buenos Aires. "But the Milei administration fell in love with a strong peso, which is very common among politicians here in Argentina."

Milei's administration has defended its policy, saying that the peso isn't overvalued and that it would continue to defend the currency.

"It's clear to us that the solution isn't to return to the catastrophic path of recurrent devaluations," Milei said last month.

It is a mess Milei inherited from his left-wing predecessors, who created a dozen exchange rates for converting pesos to dollars. The convoluted system allowed them to keep the peso strong and print money to cover ever-rising public spending. Milei found central-bank reserves depleted.

The peso is now Trump's problem too. For now, his administration has come to Milei's rescue ahead of the Oct. 26 midterm congressional election, where Milei is hoping to increase representation from the less than 15% of lawmakers from his Freedom Advances party.

The U.S. recently bought pesos and completed the framework for a $20 billion currency swap with Argentina's central bank in an effort to stabilize markets after a run on the peso last month. On Wednesday, Treasury Secretary Scott Bessent separately said the U.S. would put together a $20 billion private finance facility that could act as a backstop for Argentina's debt.

By offering robust support, the U.S. hopes it will stem the pressure on investors to dump the peso, said Brent Neiman, a former Treasury official in the Biden administration.

"Will it be enough? The psychology around the announcements really matters," Neiman said. "If Bessent's statements convince markets that the U.S. will do whatever it takes, then it may not take all that much. But given Argentina's history, that's a big 'if'."

Trump said in a meeting with Milei on Tuesday that the bailout was contingent on Milei's success in the midterms, sparking a decline in Argentine stocks. Bessent said Wednesday that U.S. support would continue as long as Argentina continues enacting good economic policies.

The peso has been a concern for Milei since he was elected in 2023. On his first day on the job, Milei devalued the currency by 50%. That caused inflation to soar to over 25% a month.

Rather than letting the peso float, which risked sparking hyperinflation, Milei allowed the peso to depreciate 2% a month against the dollar. His administration changed that system in April after receiving a $20 billion bailout from the International Monetary Fund.

The peso is now allowed to trade freely in a band with a lower and upper limit, providing a semblance of stability. Still, the peso is between 20% and 35% overvalued, private-sector economists say. One dollar is worth about 1,362 pesos.

While economists say the Argentine currency is overvalued, the peso is still the world's worst-performing currency among the 52 that Dow Jones tracks, falling 24% this year.

Alongside deep spending cuts, the strong peso helped Milei bring down inflation, which hit 32% in September, versus nearly 300% last year.

Milei hoped that achievement would boost his chances in the midterm vote, but the economy has failed to bounce back. With Argentines now more concerned about unemployment than inflation, approval of Milei's government has tumbled, with pollster Zuban Córdoba saying it fell to 35% from nearly 50% last year.

Héctor Torres, a former IMF executive director, says Milei's peso policy has created "costly mirages" in the Argentine economy. By keeping the peso stronger, he said, the government is depleting scarce dollar reserves and eroding its capacity to tap private capital markets.

Torres said the country could move "dangerously close to a new debt default."

Another problem for Milei is that Argentines are quick to sell pesos and buy dollars after decades of seeing their savings wiped out by devaluations and hyperinflation. The situation can snowball out of control as the government taps into reserves to defend the currency.

Many protect themselves by stashing tens of billions of dollars abroad or hidden under mattresses.

"The whole thing becomes unsustainable," said Robin Brooks, an economist at the Brookings Institution. "That is really bad for the economy because instead of putting money to work in investment, formation of businesses, driving the economy to have more jobs, people are basically just moving capital to protect it."

Write to Ryan Dubé at ryan.dube@wsj.com

(END) Dow Jones Newswires

October 15, 2025 22:00 ET (02:00 GMT)

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