Chavez, who was re-elected to a new six-year on December 3, has more than doubled spending in the past two years, tapping into record proceeds from the state oil company. The rise in spending has spurred demand for imports and threatens to erode Venezuela's trade surplus, Citigroup analyst Tania Reif said.

She said a decline in oil prices to below $55 a barrel would add to pressure on the government to devalue the currency.

"The current policy stance suggests that economic imbalances may continue to accumulate and culminate in a sharp adjustment for 2008," Reif said in a report.

Venezuela, the world's fifth-largest oil exporter, has kept the bolivar pegged at 2,147.30 bolivars to the dollar since February 2005. Chavez imposed restrictions on Venezuelans' dollar purchases, seeking to stem an outflow of capital, and established a fixed exchange rate system in 2003. He has devalued the currency twice since implementing the controls, weakening it 26 percent.

In street trading Tuesday, the bolivar gained 3.9 percent to 3,220.72 bolivars to the dollar, the strongest level since November 22. People and companies turn to the street market to buy dollars when they can't get access to the US currency at the official exchange rate.

Source: Caribean Net News