Venezuela Currency Plunges

The national currency plunged against the U.S. dollar Wednesday after President Hugo Chavez abandoned exchange rate controls to try to stem capital flight and restore investor confidence in Venezuela’s ailing economy.

The bolivar fell 24%, closing at 980.50 to the dollar, compared with 792.50 on Friday, the last trading day. Economists have said the bolivar was overvalued by as much as 30%.

The central bank will sell dollars to banks through an auction as part of the new currency exchange system, said Domingo Maza Zavala, the bank’s director. It will auction $60 million a day starting Monday, he said.

Reopening after a holiday weekend, several Caracas exchange houses and banks postponed dollar sales Wednesday to wait for the price to stabilize.

Chavez announced the surprise decision to abandon a controlled devaluation scheme and let the currency float freely late Tuesday. He also announced a 7% cut in government spending to help close a projected $8-billion budget deficit that threatens the oil-dependent economy.

The measures reflect a new economic reality of low oil prices, capital flight and investor jitters toward Latin America amid Argentina’s financial crisis and the slumping global economy after the terrorist attacks on the U.S., Chavez said.

International Monetary Fund spokesman Thomas Dawson praised Venezuela’s decision to abandon exchange rate controls as a step “in the right direction.”

Venezuela had spent more than $3 billion since November to prop up the bolivar. Business groups wanted the currency devalued to make Venezuelan exports more competitive.