Brazil’s central banker denies a currency war

BRAZIL’S central bank president Henrique Meirelles yesterday warned that there is a serious problem of competitive currency devaluation among central banks but refused to join the Brazilian finance minister Guido Mantega in saying that an international currency war had broken out.

Speaking to journalists at the Brazilian ambassador’s Mayfair residence, Meirelles said countries should not have to pay the price for weaker currencies elsewhere, whether it was caused by the economic situation or by specific measures to retain competitiveness. “We can’t have some countries having their currencies weakened. We are going to have a few countries pay the price for that. There is a very serious problem which should be addressed,” he said. He added that discussion should probably take place at the G20 meeting, to be held in Seoul in November.

On Monday, Guido Mantega said we are in the midst of an international currency war. South Korea, Japan and Taiwan have all recently intervened in currency markets to make their currencies cheaper and safeguard their economic strength.

Politicians, who face a general election on Sunday, are desperately trying to appease suffering exporters which have been stung by a four-month rally in the Brazilian real against the US dollar. This has been caused by foreign investment as well as speculative foreign exchange inflows seeking high yield. The real has strengthened some 10 per cent against the dollar since mid-May and 33 per cent since the start of December 2008.

Many emerging market economies, both in Asia and Latin America, have been seeking to prevent their currencies from appreciating in order to mitigate large-scale capital inflows and to avoid asset bubbles from emerging. Although the Brazilian authorities have recently intervened in the spot FX markets by buying up to $1bn a day, they have stopped short of unconventional intervention to weaken the real, says Neil Shearing at Capital Economics.

But he adds: “It seems that any further upward pressure from here will provoke an increasingly strong response from the authorities. What’s more, the heavy costs of sterilising intervention in the foreign exchange market suggests that policymakers may rely on less conventional methods to tame the currency. In short, capital controls are moving back onto the agenda.”

But investors would be wrong to see this as Brazil moving away from market-friendly policies, Shearing points out. “Brazil will remain dependent on capital inflows to fund its huge investment needs. In this context, the debate over capital controls should be welcomed as a sign of an increasingly mature approach to policymaking rather than a relapse to non-market friendly practices.” Meirelles said it remained an open possibility that the Brazilian government would raise taxes on capital inflows but added that the decision rested with the finance minister. Last October the government imposed a 2 per cent tax on foreign purchases of equities and bonds.

Meirelles refused to be drawn on what he thought was an ideal value for the real. Shearing believes that the fair value is around $1.80-$1.90. But with high interest rates, a booming economy and competitive currency devaluation, it may be some time before Meirelles and his colleagues succeed in returning the real to fair value.