Currency wars continue

Currency wars continue, Brazil's finance minister warns

Submitted by cpowell on Wed, 2011-07-06 03:57. Section: Daily Dispatches

By Chris Giles and John Paul Rathbone
Financial Times, London
Wednesday, July 5, 2011

http://www.ft.com/intl/cms/s/0/36ee3298-a731-11e0-b6d4-00144feabdc0.html

Brazil is preparing a range of additional measures to stem the damaging rise of the real as the global currency war shows no signs of ending, according to Guido Mantega, the country's finance minister.

Speaking to the Financial Times in London, Mr Mantega said the Group of 20 leading economies was still a long way from achieving its goal of agreeing new guidelines for managing currencies, there were "struggles between countries" such as the US and China, and the global currency war was "absolutely not over."

Slow growth and low interest rates in advanced economies continued to put upward pressure on Brazil's currency, Mr Mantega said, forcing the authorities to consider further intervention in currency and derivatives markets to limit overshooting.

"We always have new measures to take," he told the FT, indicating on the sidelines of an investor conference that these would not be pre-announced but would include market intervention. On Tuesday the Brazilian central bank also announced a spot auction to buy US dollars in another move to boost foreign exchange reserves and stem the upward pressure on the real.

The Brazilian currency has been close to 12-year highs against the dollar in recent weeks, but fell by 0.7 per cent on Tuesday.

Brazil's actions to limit currency appreciation highlight the dilemma faced by many fast-growing economies -- including Turkey, Chile, Colombia, and Russia -- since allowing currency appreciation limits domestic overheating, but also undermines the competitiveness of domestic industry.

"I gave a speech to investors and I hope they did not receive it too enthusiastically," Mr Mantega joked, "because there is a tendency for too much capital to enter."

Brazil had to take other actions, he added, because domestic interest rates were already high, so as to curb inflation, and further rate rises alone tended to encourage further capital inflows. Brazil has already instituted a number of measures, including taxing bond portfolio inflows, to try and curb the real's appreciation.

"Monetary policy is very tight in Brazil and the level [of interest rates] in real terms is higher than in other [emerging] countries," Mr Mantega insisted.

With the main policy rate at 12.25 per cent, he rejected the notion that Brazil was overheating, saying the economic growth rates were sustainable, inflation was falling, and the fiscal deficit was coming down. The economy is forecast to grow by 4 per cent this year after expanding 7.5 per cent in 2010.

Credit growth -- at 15 per cent this year -- was lower than the 22 per cent rate in 2010, he added, partly as a result of government restrictions on banks borrowing cheaply at low interest rates from the US, but he looked forward to the day when lower inflation allowed "monetary policy more flexibility."

Mr Mantega's comments highlight the low-level currency war between emerging and advanced economies that has unsettled global financial markets. This will be one of the issues facing Christine Lagarde, who started work as managing director of the International Monetary Fund on Tuesday.

Brazil supported the new French managing director over her Mexican rival, Agustín Carstens, but Mr Mantega insisted there was no "regional rivalry" between Latin America's two biggest economies. Mr Mantega said he felt Ms Lagarde would be more effective at advancing the cause of developing nations.