Venezuela's currency is to be allowed to float freely against the dollar in a bid to stop capital leaving the country.

President Hugo Chavez said the move was necessary to "improve the competitiveness" of Venezuela's exports which had been "buffeted by low oil prices".

Mr Chavez also announced budget cuts of 7% to tackle the deficit, which is expected to hit $8bn this year.

By allowing the currency to float freely, Mr Chavez has abandoned his government's attempts at a controlled devaluation of the bolivar.

Army reassurance

Traders in the country's capital, Caracas, said the bid to control the bolivar's slide had cost more than $3bn since last November, when the government introduced a package of economic reforms.

The central bank spent $500m to shore up the currency last week alone, according to traders.

Banks and currency markets are due to reopen on Wednesday after a national holiday during which the army assured the nation there was no unrest within its ranks.

The bolivar was trading at 750 to $1 at the start of this year, but had weakened to 792 when banks shut for the holiday.

Venezuela becomes the second Latin American country to permit its currency to float against the US dollar within a week.

On Monday, Argentina finally gave up attempts to stave off a move many analysts have viewed as inevitable since Argentina scrapped the peso's peg to the US dollar and defaulted on $141bn of debts at the start of the year.

But initial fears that Argentina's economic woes would spread around the region, in particular to Brazil and Mexico - the others among Latin America's 'big three' economies - quickly receeded.

Resistance

Venezuela has been racked by strikes and Mr Chavez has previously threatened to nationalise any banks that resisted wide-ranging land redistribution and banking reforms.

Although the devaluation will help cheapen Venezuela's exports, the government now risks a sharp rise in the cost of imports, which could trigger further unrest.

In November 2001, the Venezuelan government used fast track legislative powers to decree 49 laws covering areas ranging from fishing to financial services.

Under the new laws, banks are obliged to lend 15%, nearly double the previous amount, of their portfolios to small farmers.

Some bankers have said they would rather pay a fine for disregarding the law than provide more loans.

Other controversial reforms, include laws to redistribute "idle land" and increase state control over the oil industry, Venezuela's major source of revenue.

Business leaders have appealed to the Supreme Court to overturn the rules and threatened to call further protests if the reforms are not suspended.