Roula Khalaf, the Editor of the Financial Times, curates a selection of significant news stories in this weekly newsletter, focusing on developments that shape our world.

This week, Argentina's libertarian president, Javier Milei, has made a pivotal and high-risk change to his economic strategy by abandoning a crucial currency policy that has been essential in his ongoing battle against rampant inflation, a move that has caused unease among investors.

Throughout his presidency, Milei has relied heavily on Argentinas longstanding strict currency controls to combat the nation's chronic inflation problem. While these controls had initially helped to stabilize the economy, the central bank has expended a significant amount of its limited dollar reserves in an effort to bolster the peso in real terms. This strategy, however, has begun to show cracks, raising concerns about the sustainability of such an approach.

Despite widespread expectations from analysts that Milei would maintain this currency strategy until the crucial midterm elections scheduled for Octobergiven that the inflation slowdown is vital to his campaignMilei took a bold step. On Monday, he dramatically shifted course, announcing a partial float of the peso and easing restrictions on Argentines' ability to purchase dollars, thereby significantly loosening the previously stringent controls.

In a radio interview, Milei addressed the surprise his decision generated with his characteristic bravado. He remarked, I always promised that if I had [a lot of dollars] in my hand, Id lift the controls. How could I not if it means liberating Argentines? What does an election year have to do with it? This statement underscored his commitment to liberalizing the economy, even amid potential political fallout.

His decision was influenced, at least in part, by the precarious state of the central banks reserves, which have been severely depleted. Recently, a sell-off of the peso had compelled the central bank to use more of its dollar reserves to stabilize the currency, heightening the risks of an official devaluation that could destabilize the economy further.

With the backing of an unexpectedly large $20 billion loan from the International Monetary Fund (IMF), Milei managed to alleviate some of this pressure. Following the announcement of the partial float, the peso fell by 6 percent in its first week, a decline that, while noteworthy, was less severe than many economists had anticipated and still kept the currency stronger than the newly established upper limit of 1,400 pesos to the dollar.

However, maintaining this level of stability is paramount in a country like Argentina, where even minor fluctuations in the exchange rate can trigger inflationary pressures, as businesses are accustomed to increasing prices to safeguard their profit margins. Economists are predicting a slight rise in the monthly inflation rate following a significant increase from 2.4 percent in February to 3.8 percent in March, signaling potential challenges ahead for Milei's administration.

This is the big challenge, stated Cristin Butti, the director of the pollster CB Consultora. If we do see more inflation, can the government maintain the sense that things are improving? Or will a climate of doubt start to emerge? He further emphasized the delicate nature of public confidence, warning that any erosion of trust could lead to uncontrollable consequences for the government.

Fortunately for Milei, certain seasonal factors may work in his favor in the coming months, particularly with the onset of the April to June soy harvest, which typically brings in an influx of dollars that can bolster the countrys reserves. To capitalize on this, he has urged exporters to sell their crops quickly, warning them that a recent cut in export taxes will expire in June. Additionally, financial investors are likely to inject more dollars into the economy, attracted by the lucrative peso trades made possible by Argentina's high interest rates.

The confidence in the central bank has received a boost from the IMFs substantial $12 billion upfront disbursement, alongside the renewal of a $5 billion loan from China, and a pledge of full support from U.S. Treasury Secretary Scott Bessent during his visit on Monday. Nevertheless, as the midterm elections in October approach, pressures on the exchange rate could escalate, according to Toms Tagle, a strategist with Bull Market Brokers in Buenos Aires.

Market actors in Argentina typically convert pesos to dollars before elections, and we must remember that many traders had previously argued that the peso was overvalued, Tagle added, highlighting the potential volatility that could accompany the election cycle.

This shift in economic strategy follows a tumultuous few months for Milei. In February, he found himself embroiled in controversy over the promotion of a memecoin, which saw its value skyrocket before subsequently plummeting, leading to allegations of fraud. In Congress, an investigation is currently underway regarding this incident.

Additionally, his recent attempt to appoint a controversial judge to the supreme court by decree faced significant backlash and ultimately failed, further straining his already tenuous relationship with lawmakers.

Public support for Milei has waned, dropping from a high of 51.8 percent in December to 46.1 percent in March, according to data from CB Consultora. This decline is particularly pronounced in low-income neighborhoods, where the effects of austerity measures and inflation are felt most acutely.

According to Sergio Berensztein, an Argentine political consultant, the significant IMF deal represents a critical opportunity for Milei to revitalize his presidency after a period marked by challenges. This reset is deemed urgent as he aims to strengthen his small congressional minority ahead of the midterms and solidify his reform agenda.

Pollsters predict that Milei may perform well electorally, given the left-leaning Peronist opposition's struggles to articulate a coherent message following their last governments role in deepening Argentinas economic crisis. However, Milei has resisted forging alliances with potential conservative allies that could enhance his chances of success.

The recent local elections in Santa Fe province, which were closely monitored, resulted in a disappointing third-place finish for the libertarians, serving as a stark reminder of the challenges that lie ahead.

A poor showing in the upcoming October elections could have dire consequences, undermining confidence in Mileis ability to sustain a floated currency and effectively tackle inflation. The last attempt to lift currency controls was thwarted by an unexpected victory for the Peronists in a pre-election poll in 2019, which spooked the markets and led to a run on the peso, forcing former President Mauricio Macri to reinstate the controls shortly thereafter.

As analysts speculate about Mileis current strategy, Nicols Dujovne, who served as the co-leader of the economy ministry during Macri's presidency, noted, Until a pro-market government is reelected in Argentina, it will struggle to withstand political shocks. He expressed optimism about Mileis decision to relax controls, underscoring the importance of demonstrating tangible results that improve people's lives to prevent any desire for course changes.