Brazil ready to retaliate for US move in ‘currency war’

Financial Times

Brazil ready to retaliate for US move in ‘currency war’

By John Paul Rathbone in London and Jonathan Wheatley in São Paulo

Published: November 4 2010 18:28 | Last updated: November 4 2010 18:28

Brazil, the country that fired the gun on the so-called “currency wars”, is girding itself for further battle.

Brazilian officials from the president down have slammed the Federal Reserve’s decision to depress US interest rates by buying billions of dollars of government bonds, warning that it could lead to retaliatory measures.

“It’s no use throwing dollars out of a helicopter,” Guido Mantega, the finance minister, said on Thursday. “The only result is to devalue the dollar to achieve greater competitiveness on international markets.”

At a joint press conference with president-elect Dilma Rousseff, outgoing president Luiz Inácio Lula da Silva said on Wednesday he would travel to the G20 summit in Seoul with Ms Rousseff, ready to take “all the necessary measures to not allow our currency to become overvalued” and to “fight for Brazil’s interests”. “They’ll have to face two of us this time!” he said.

Ms Rousseff added: “The last time there was a series of competitive devaluations. . . it ended in world war two.”

Brazil has been an early casualty in the currency wars, as the real has risen by 39 per cent against the dollar since the start of 2009, prompting fears it will hollow out Brazil’s industrial base by making manufactured exports uncompetitive. Data released on Thursday showed September industrial output was 2 per cent lower than in March.

“Brazilian industry is well and truly stuck in a rut, due in part to the recent strength of the real,” Capital Economics, a London-based research firm, said in a note to clients on Thursday.

“[The Fed’s decision] is cause for concern. These are policies that impoverish those around them and end up prompting retaliatory measures,” Brazil’s foreign trade secretary, Welber Barral, said separately.

With local benchmark interest rates at 10.75 per cent – the G20’s highest after stripping out 5 per cent inflation – international capital has flooded into Brazil. To curb that, the country has imposed a 6 per cent tax on bond inflows, but with limited effect so far.

Emerging market fund managers say the tax, paid on point of entry, has had some impact on short-term bond investors – but not on long bonds held to maturity which, after netting off the tax, still provide a yield of about 11 per cent.

“That’s higher than you can get anywhere else, especially for an investment- grade credit,” said Kieran Curtis, emerging markets fund manager at Aviva Investors who manages £1.3bn of emerging bonds.

Economists agree that one reason why Brazilian interest rates are so high is loose fiscal policy. Federal government spending has grown by 18 per cent this year. Ms Rousseff has pledged to trim government spending, although there are doubts that she will be able to push through cuts.

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