Dedollarization is under threat in Argentina after the US dollar zoomed 5,000% versus the peso over the past decade

• The US dollar soared almost 5,000% versus Argentina's peso over the past decade, as the country faces a debt and inflation crisis.
• That's fueling calls for the nation to dump the peso and adopt the greenback itself as its currency. 
• That could undermine Argentina's efforts to cut its reliance on the US currency for trade and debt payments.

Argentina's push to cut its reliance on the US dollar for trade and debt payments is facing headwinds from the deepening plunge of its own currency, the peso.

The US currency rocketed 4,800% against its Argentine counterpart over the decade through June, and the trend has accelerated in recent years as the South American nation battled hyperinflation and mounting debt troubles. The country's external debt hit 45% of its GDP as of end-2022, CEIC data show. Consumer prices surged 114% in May from a year earlier.

The exchange-rate and inflation crisis has fueled a campaign for Argentina to dump the peso, and adopt the US dollar itself as its currency. A leading proponent of this idea is presidential candidate Javier Milei. Veteran economist Steve Hanke said this week that "dollarization" is the only way out for Argentina from its debt trap.

That flies straight in the face of the country's efforts to move away from using the greenback. Argentina just made a dollar-free debt payment to the International Monetary Fund, using the Chinese yuan and the so-called special drawing-rights notes. The country is allowing yuan-based bank accounts and has discussed plans for a joint currency with Brazil, to be called the sur.

Nations including China and Russia have been trying to detach themselves from the greenback's dominance, with Beijing pushing for the yuan to replace the US currency in oil trades. Moscow and Iran have been working on a gold-backed stablecoin, while India and United Arab Emirates are exploring doing non-oil trade in rupees.

Meanwhile, the Argentine peso has tumbled 35% against the dollar so far this year, after a 44% drop in 2022.

A weakening currency tends to worsen inflation because it typically leads to higher import prices, likely explaining Milei's dollarization suggestion. In Argentina's case, a crippling drought that hit the country's agricultural exports resulted in the nation depleting its US dollar reserves given it traded fewer crops in the greenback, leading to the worst dollar shortage since 2016. 

But with a trifecta of problems bombarding Argentina, it looks like dedollarization may not be an easy solution.