(This article was originally published Monday.)


By Darcy Crowe
Of DOW JONES NEWSWIRES

CARACAS (Dow Jones)--The Venezuelan bolivar Monday continued trading close to last week's record low against the dollar in the unregulated market, casting severe doubts on the government's repeated pledge to bolster the local currency.
Authorities appear to be either ignoring the currency's decline or to have a depleted arsenal at their disposal to boost the bolivar. The bolivar's decline appears poised to continue unless there's a major change in the government's strategy in dealing with the parallel rate.
The bolivar traded Monday against the dollar at VEF7.15, only posting a slight improvement from the record low of VEF7.2 struck last week in the face of underwhelming interventions by the central bank.
The monetary authority acted against the bolivar's slump last week by infusing $50 million in bonds designed to boost the currency. But this strategy has become the central bank's intervention modus operandi, even though in recent times it has failed to support the currency.
The bolivar has dropped 17% so far this year, despite bonds sales totaling $358 million since the beginning of January.
The decline is a humiliating setback for President Hugo Chavez and his economic team after they devalued the bolivar's dollar-peg in early January. They pledged that the local currency would strengthen in the country's so-called parallel market, which Venezuelans use to sidestep currency controls.
The central bank bond sales allow Venezuelans to obtain dollars by buying the bonds with bolivars and receiving dollars at maturity. But analysts say the sales are simply insufficient, and so fail to boost the bolivar.
Some estimates suggest that daily volume in Venezuela's parallel currency market reaches $100 million per day and unless there is a change in the government's strategy or the amount issued in the bond sales, little hope for a stronger bolivar in the parallel market exists.
"Aside from the sporadic auctions of the last month, [the authorities] seem willing to let the parallel rate trend higher," said a recent research report from J.P. Morgan. The central bank is being cautions about burning its dollar reserves for the sake of controlling the parallel rate, the report said.
The central bank's international reserves hit a year-low last week, bottoming out at $28.8 billion after it completed a $5 billion transfer to the Fonden development fund, an off-budget spending vehicle used by Chavez to pay for social and infrastructure projects.
"A main part of the problem at this point is the private sector must compete for [foreign exchange] reserves with Fonden," the report from J.P. Morgan said.
Importers are having to turn to the parallel market to buy dollars resulting in price increases and faster inflation, which stands at 27% for the last 12 months.
Russ Dallen, of Caracas-based BBO Financial Services, said the bond sales have had "no real impact" on the parallel rate, while other factors continue to push the bolivar lower.
Dollar sales by the government are at the same level as last year, despite an increase in the price of oil, the main source of U.S. currency for Venezuela.
Importers of items such as food and medicine, which receive a subsidized dollar rate of VEF2.6, are seeing their dollar requests approved. But the larger chunk of importers of nonessential items in theory should receive dollars at VEF4.3 per dollar in the official market, but aren't receiving enough, and so instead turn to the parallel market, Dallen said.
"Demand in the swap market remains high, with little offer available in large sizes, pushing the market higher," he said.
A few days after the devaluation in January, Chavez said the government would bring back the parallel rate to the same level as the official VEF4.3 rate. "A lot of prices should decline. What we've really done is a revaluation [of the bolivar], not a devaluation," he said Jan. 15.
Price increases, however, started to accelerate in March after slowing in the first three months of the year. The parallel rate is one of the factors cited by economists for the increase as retailers adjust prices depending on how the bolivar fares against the dollar.

-By Darcy Crowe, Dow Jones Newswires; (58) 414 249 6821; darcy.crowe@dowjones.com