The Argentine peso experienced a sharp decline on Wednesday, breaking through its government-set trading band for the first time, potentially disrupting policies aimed at controlling inflation and accumulating foreign exchange reserves.

The peso fell nearly 0.4% against the US dollar to 1,474.50 pesos per dollar, surpassing the upper limit of its trading band, which was set at 1,474.345 pesos per dollar for the day. This trading band restriction forms part of Argentina's $20 billion agreement with the International Monetary Fund reached in April.

President Javier Milei's administration had attempted to prevent peso depreciation through various measures including tightening liquidity, selling dollars in the futures market, and restricting dollar purchases. With the trading band now breached, the central bank is authorized to intervene directly in the spot market, which would involve deploying valuable foreign exchange reserves.

Thierry Larose, portfolio manager at Vontobel Asset Management, cautioned that defending the band could now prove costly.

"They don't want to defend it to the death," Larose stated. "It would be better to adjust the band upward. They need to lower local interest rates to avoid recession and maintain fiscal sustainability. As long as it's done in an orderly fashion, that's fine. Equally important is avoiding depleting foreign reserves in a battle they're unlikely to win."