Concerns about U.S. credit markets prompted investors to sell out of emerging markets and seek safety in dollars and U.S. investments.    

A series of domestic factors, too, played a part in the peso's depreciation to its weakest point since March 2003, including an energy shortage, rising inflation, narrowing fiscal and trade surpluses and a series of corruption scandals, the latest of which toppled Economy Minister Felisa Miceli.    

On top of this, the government is viewed as manipulating inflation data, is paying out millions in energy and farm subsidies and allowing 15-20% increases in salaries. And the central bank has restricted the liquidation of financial investments in overseas markets, discouraging people outside the country from buying bonds and stocks.    

"The sum of all these things sparked a change in investor attitudes," said Hector Blanco, a currency trader at ABC Mercado de Cambios in Buenos Aires. "People said, 'I don't like this scenario' and pulled out. And others said, 'If they are doing it so will I.'"    

This week saw the biggest intraday movements in the currency since the government set a policy of maintaining a quasi-fixed exchange rate of 3.0 pesos per dollar after the country emerged from a 2001-02 economic crisis.    

The stable and weak exchange rate has helped fuel the economy's more than 8% annual growth since 2003 by fostering exports and deterring imports. This has boosted demand for local products, spurring industrial production. Tourism has boomed as the destination, prohibitively expensive under a one-for-one exchange-rate mechanism between 1991 and 2001, became beckoningly cheap in dollar terms.    

Yet to sustain the exchange rate, the central bank must buy incoming dollars and issue pesos in exchange. It then mops up excess pesos in the market with debt sales, helping limit the impact of high liquidity on inflation.     In the process, the central bank has built up hard currency reserves of $44 million -- an amount the government fondly says will shield the country from the external vulnerabilities so common during the 1990s.     T

he central bank's intervention has kept the peso trading between 2.90 and 3.10 since 2003, with minor intraday fluctuations.    

On Wednesday, the central bank sold dollars at 3.185 in the spot market and sold in futures markets, traders said. This eased the slide after it hit 3.20 per dollar. But the nervousness of investors led peso futures to slide Wednesday to 3.192 for the end of July, 3.205 for the end of August and 3.22 for September. The expectation for the end of the year is 3.20-25.    

Investors are looking for the new trading range for the peso and how this will affect the economy, inflation and public finances at a time when the government must make $3.45 billion in debt repayments in August, with the bulk falling due in the first week.    

This has raised speculation of what the government will do to meet these payments and keep the money in the country, possibly by selling a bond.    

"If the market stabilizes, it could be a good time to reinvest," making new securities attractive, said MVAS' Morgenstern. "If yields were good three months ago in peso bonds, now they are better and will get better."    

A threat of a weaker peso is higher inflation, as it pushes up cost in pesos of dollar-based goods like beef, corn, wheat and other international commodities.    

So why change policy now?    

Opinions on the central bank and government's strategy are diverse. Neither entity has openly commented on its plans with the depreciation of the peso.     T

he shift began with a July 4 central bank resolution making it harder to liquidate investments in Argentine financial securities outside the country.    

The regulation, dubbed blue chip swaps, requires funds used in financial transactions to be immobilized for 10-20 days compared with same-day swaps previously. Swaps also must go through bank accounts, not brokerage accounts.    

With the changes, "foreign investors are less interested in Argentina," said Emiliano Wachs, an analyst at Grupo SBS in Buenos Aires.    

According to some traders, newly-installed Economy Minister Miguel Peirano wants greater volatility in currency markets, with the peso trading between 3.10-3.20.    

As with restrictions on blue chip swaps, greater volatility will discourage the inflow of financial investment dollars, making it easier for the central bank to maintain the exchange rate. Before, investors were virtually guaranteed a rate around 3.10 per dollar.    

The central bank "is taking advantage of the situation to maintain the exchange rate without having to intervene so heavily in the market," said Jorge Morgenstern, an economist at MVAS Macroeconomia in Buenos Aires.    

Its heavy dollar buying -- it reached up to $200 million a day during the large grain harvests of April-June -- was pushing the bank toward the limit of its monetary targets, he said.    

The restrictions on foreign investment come as interest in the country's bonds and stocks declines despite strong returns. Inflation linked bonds in pesos, which make up 42% of the country's outstanding bonds, are posting yields of the equivalent of 12% in dollars.    

Early this year, the government began manipulating consumer price inflation data to meet a target of less than 10% annual inflation this year, in line with 2006, after the effectiveness of its system of negotiated price controls started failing. The fiddling with numbers has cut CPI in the capital and surrounding environs to less than 9% compared with 15% in the rest of the country.    

"The manipulation of data has changed the contract conditions" of the inflation-linked bonds, said Eduardo Blasco, an economist at Buenos Aires consulting firm Maxinver.    

"Now the feeling is that if inflation surges then the government will put a ceiling on it," reducing the returns on peso bonds that are tied to inflation numbers in greater Buenos Aires, he said.    

 "When there are uncertainties and a lack of legal security, there is a lack of confidence," he said. "This is reducing demand for these bonds. It's not because of credit risk. Nobody is thinking there will be a financial crisis in Argentina. It is because the government doesn't do things orderly. There are always doubts."    

Another issue is the energy crisis, he said.      

Energy experts began predicting shortages in the late 1990s, as energy production and investment in power plants, natural gas pipelines and oil refineries began dwindling. The government of President Nestor Kirchner hasn't improved the situation, instead keeping in place a cap on energy prices that has worsened the situation.    

To deal with the shortages, the government unexpectedly came out with a plan this month to subsidize the purchase of liquid fuels by factories at some 75% of their real price because of pricing caps that have kept energy prices at 50-80% lower than in international markets since 2002.     As a large portion of the liquid fuels must be imported, the subsidies are cutting the fiscal surplus at a quicker-than-expected pace, said Roberto Cachanosky, an economist in Buenos Aires.    

And a weaker exchange rate of 3.15-20 means it will have to pay more in subsidies to import energy, he added.  

The fiscal surplus has been narrowing this year as the government ramps up public spending in the run-up to October's presidential election.  

"There is a bad sentiment about what is happening in Argentina," said Esteban Fernandez Medrano, an economist at MacroVision Consulting in Buenos Aires.  

"There isn't a concern of a crisis but there are signs of deterioration," he said. "This is making investors cautious."   For companies focused on the domestic market, a weaker peso will boost costs for importing materials and slim profits as the government controls the prices of many products.

Companies like toy makers, which use imported plastic, already are complaining that suppliers are shortening the traditional 45-day payment periods.  

Of course, there is a plus side to a weaker peso.  

For one thing, it will help boost exports by making the country's products more competitive against those from countries with stronger currencies. This in turn will boost tax revenue on exports, which accounts for nearly 10% of state income.  

And few doubt that the central bank can control the situation thanks to its $44 billion in hard currency.  

"With this level of reserves, it will be hard for the exchange rate to escape from what the central bank wants," said MacroVision's Fernandez Medrano.  

Yet, said the economist Cachanosky, the central bank is running the risk that "it may become harder to keep the situation under control."