Chavez Announces Currency Devaluation, Claims U.S. Invaded Airspace

President Hugo Chavez announced a currency devaluation Friday for the first time since 2005, setting a two-tiered exchange rate designed to help Venezuela's oil earnings go farther domestically while holding down prices of priority imports like food to counter soaring inflation.

Chavez said the bolivar will now have two government-set rates: 2.60 to the dollar for transactions deemed priorities by the government, and 4.30 to the dollar for other transactions. The devaluation dropped the currency's value by 17 percent or 50 percent, depending on the tier.

The higher rate, which he called the "oil dollar," will double the paper value of Venezuela's petroleum earnings when converted to local currency. Oil accounts for about half the government budget, but that income has been squeezed by lower world oil prices in the last year.

At almost the same time, Chavez accused a U.S. military plane of entered Venezuelan airspace, claiming it was met by his military's F-16s, which escorted it out. Chavez called it a provocation by the U.S. government, but U.S. officials say there is no truth to the claim.

The priority exchange rate will be allotted for food, health care products, school supplies, machinery and equipment for economic development, among other things, Chavez said.

He said the new rates aim to boost the productive economy, "braking imports that are not strictly necessary and stimulating export policy."

Imports that will fall under the less favorable rate include automobiles, telecommunications goods, computers, appliances, alcohol and tobacco.

The currency's official exchange rate has been held steady by the government at 2.15 bolivars to the dollar since 2005.

The currency devaluation is expected to have a mainly domestic impact, and limited effect internationally. The government has maintained strict currency exchange controls during 2003 to try to contain capital flight, and has set a fixed exchange rate that overstated the bolivar's value on the black market and in bond trading.

Chavez also said the government will intervene in the lucrative parallel bond market, where the rate has been hovering at about 6 bolivars to the dollar, nearly one-third the official rate. He did not give details about what actions the government would take.

The devaluation comes as the oil-exporting country struggles with a recession and 25 percent inflation, the highest in Latin America.