(This article was originally published Tuesday)

By Darcy Crowe

Of DOW JONES NEWSWIRES

CARACAS (Dow Jones)--The dollar recently surged in one of the darker foreign exchange corners in the hemisphere, posting a 20% jump against the Venezuelan bolivar in less than two weeks after being battered for most of the year.

The abrupt reversal in the dollar's downward trend against the bolivar in Venezuela's unofficial foreign exchange market has forced analysts and traders to wonder if the government of President Hugo Chavez has shifted its recent policy of keeping a lid on the U.S. currency.

The evolution of the greenback against the bolivar will hinge on the government's debt strategy for the rest of the year. To keep stringent currency controls, the government resorts to selling dollar-denominated debt to quell pent-up demand from Venezuelans that can't buy U.S. currency at the official exchange rate of 2.15 bolivars.

There appears to be ample evidence that the dollar is unlikely to return to the VEB3.1 levels seen earlier this year and that it could go above the current VEB4 level.

The change in trend could be crucial for Venezuelan importers, who use the black-market rate to gauge costs and set prices. Even companies that are green-lighted by the government to buy dollars at the official rate keep a close watch on the black market to outline their plans since "they have no guarantee that they will receive approval in the future," said Abelardo Daza, head of local firm ODH Consultores.

The black-market rate can also be a key inflationary force. Drastic jumps in the dollar are quickly reflected in scores of imported goods, accelerating price increases.

The government saw this happen in 2007. Inflation started to spin out of control in the second half of last year, pushed in part by a surge in the dollar. At one point last year a greenback fetched almost three times the official rate.

As the U.S. currency consistently climbed in 2007, the government's official position regarding the black market was overwhelmingly inconsistent.

Officials simultaneously accused traders of pushing up the rate, argued that the black market's volume (which supposedly is less than 5% of the official dollar sales) was insignificant, and passed legislation banning the publication of the black market rate.

Former Finance Minister Rafael Isea tacitly responded by acknowledging the relevance of the black market rate and deciding to bring it down as a primary anti-inflationary weapon.

He inundated the market with dollars through the sale of debt instruments that bundled sovereign debt that Venezuela bought from other South American nations. Investors that bought these notes paid in bolivars and resold them in exchange for greenbacks.

The strategy paid off and the dollar plunged as much as 50% this year.

Different Minister, Different Rate

Isea's successor, Finance Minister Ali Rodriguez, however, appears to have taken a more laid back approach regarding the black-market rate.

He recently halted the sale of dollar-denominated notes made up of Argentine debt, spawning the dearth of greenbacks that is behind the dollar's recent surge.

"Isea's strategy has been ruled out and killed," said Asdrubal Oliveros, of local research firm Ecoanalitica.

Rodriguez has been mostly hushed on the impact of the black-market, instead blaming increased consumer demand and faltering production capacity for Venezuela's inflation malaise, which in July accelerated to a yearly rate of 33.7%.

Last week, the minister made a cryptic statement when he said at a press conference that he has been analyzing a possible bond buyback, which has apparently been on hold for months, and a bond sale. "It's possible that in coming days (we see some) operations of this sort take place," he said.

Traders and analysts are still wondering what that meant, but some, like ODH's Daza, predict that the government's debt strategy will not necessarily be geared towards keeping the dollar down in the parallel market. "Whatever they do, they will be looking at the medium term impact" of any debt operations, he said.

To further strengthen the dollar there's also plenty of political turbulence on the horizon as Chavez and the opposition parties warm-up for regional elections slated for November. The run-up to a constitutional referendum last year saw a massive jump in the black-market rate and the same could happen this year, some traders pointed out.

The last months of the year are also traditionally filled with rumors and speculation about a possible devaluation in the government's official peg, which has been left unmoved during almost two years despite high inflation, creating severely overvalued currency. This could push the dollar further, said Andreas Faust, an economist with Banco Mercantil.

The Venezuelan government may also be happy to let the dollar temporarily climb. At least a dozen Venezuelan banks faced severe losses on the dollar's plunge this year as they were heavily invested in dollar-denominated debt instruments that the government is now forcing them to sell.

The government still has some $2 billion in Argentine paper. Additionally, the government has at its disposal $700 million in structured notes in the Fonden development fund - an off-budget spending vehicle favored by Chavez. Traders said this is not enough to bring down the dollar to the VEB3.1 levels seen earlier this year.

-By Darcy Crowe, Dow Jones Newswires; (58) 212 905 6304; darcy.crowe@dowjones.com

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(END) Dow Jones Newswires

09-03-08 0933ET