The currency war - the Brazilian view

Brazil has been feeling the full heat of competitive currency devaluations and it was Brazil's Minister of Finance, Guido Mantega, who coined the term 'currency war' to describe this recent phenomenon. The following piece, compiled from reports from MercoPress (an independent news agency based in Montevideo, Uruguay which focuses on delivering news related to member countries of the Mercosur trade bloc in Latin America), provides the Brazilian perspective on these developments.

BRAZIL won't allow its currency, the real, to appreciate excessively as other countries weaken their currencies to gain market share for exporters, its Finance Minister Guido Mantega said on 28 September during a business event in Sao Paulo.

'We are experiencing a currency war,' Mantega said. 'Devaluing currencies artificially is a global strategy.'

A weaker exchange rate makes a country's exports cheaper, helping to boost the economy out of the global downturn. However, the problem is when the policy proliferates, which makes it most difficult to coordinate the issue globally.

The real has gained in value by over a third against the US dollar since the beginning of 2009, making Brazilian exports more expensive in dollar terms and cutting into profits for exporters. The comments echoed Mantega's words on 15 September, when he pledged that Brazil was 'not going to lose this game'.

'The Brazilian government has an arsenal of instruments to cope with the situation and will not let the real strengthen too much and much less suffer harming effects from other countries' exchange rate policies,' warned Mantega.

Brazilian measures

The government has taken measures to prevent further appreciation of the real. In January the central bank sold a total of 20,000 currency futures contracts for a reported $988 million in the first auction of its kind since May 2009. 'Entering the futures market is a sign that in this currency war, [the government] will not allow the currency to go above 1.65 [real per dollar],' said Luiz Eduardo Portella of Banco Modal. 'I believe this will change things short term, the real will go up to 1.75, 1.80 [real per dollar],' he added.

'I'm not sure we'll see reverse currency swaps every day like we did in the past, but it seems like the central bank could act now with a certain frequency in the futures market,' said Flavio Serrano, Senior Economist for the Brasil do Espiritu Santo Investment Bank in Sao Paulo. The strength of the real has been weighing on industry even as the Brazilian economy advances.

'When one enters into the reverse currency swaps market that neutralises sales and prevents the real from getting stronger,' said Mantega on 17 January.

The central bank has already imposed a reserve requirement on short-term dollar positions in banks, and bought dollars on a daily basis in its attempt to contain the appreciation of the real. However, the strength of the Brazilian economy, in conjunction with one of the highest interest rates in the world, has continued to attract foreign investors in search of higher yields.

Brazilian President Dilma Rousseff has said multilateral bodies should tackle currency issues and developed countries must 'assume their responsibility'.

'It's well known that Brazil and Argentina suffer, that all emerging market countries suffer, as a result of the depreciation policy practised by the countries in question,' Rousseff told the Argentine press on 30 January when asked about the role of the United States and of China.

'Our position in the G20 [grouping of major economies] needs to be one of increasing reaction against these depreciations, which always lead to difficult situations in the world. I'm talking about the so-called competitive depreciations,' she added.

US view

During his 7 February visit to Brazil, US Treasury Secretary Timothy Geithner told an audience in Sao Paulo that emerging markets such as Brazil had been buffeted in recent years by other countries with large current account surpluses and inflexible currencies.

Geithner did not mention China by name. Yet his comments will likely be well received by the Brazilian government, which is seeking closer ties with Washington in part out of hope that the two countries can work together to convince China to let its currency appreciate faster.

'As countries with large surpluses act to strengthen domestic demand in their economies, open their capital markets and allow their currencies to reflect fundamentals, we will see more balance in the flow of capital, less upward pressure on Brazil's currency, and more robust growth in Brazil's exports, especially manufacturing exports,' Geithner said at a think-tank in Sao Paulo.

Geithner also added that countries such as Brazil that face an 'outsized burden' due to their strong currencies 'may need to adopt carefully designed macro-prudential measures' - a tacit endorsement of capital controls that Brazil has recently implemented to ease strong inflows.

Concern over dollar

Some members of the G20 say China is causing problems with trade and currencies by manipulating the value of its money. But Brazil's Mantega says the Federal Reserve efforts to stimulate the US economy are causing just as many problems for Brazil.

The US and some other nations complain that Beijing obtains an unfair price advantage for its exports by pushing down the value of its currency, the yuan. Some economists say China's policy has hurt the economies of both Brazil and the US.

But in a telephone conference with journalists in mid-February, Mantega said bluntly that there is no plan for joint action by Washington and Brazil to press China for change. 'Brazil is as concerned about the decline of the US dollar as it is about the Chinese currency,' he said.

Mantega says Washington also hurts Brazil when efforts to stimulate the US economy with low interest rates and a massive programme to purchase financial assets cut the value of the dollar.                                 

Sources

MercoPress news agency reports:

'Brazil claims "global currency war" has broken out, but we have an "arsenal"', 28 September 2010

'Brazilian central bank intervenes in futures dollar market to stop real appreciation', 17 January 2011

'Rousseff blasts US and China's currencies' "competitive depreciation" policies', 1 February 2011

'Geithner implicitly endorses "capital controls" during Brazilian visit', 7 February 2011

'Brazil as concerned with the US dollar as with China's yuan', 17 February 2011

China 'not too worried' about India/Brazil's criticism of yuan policy

IN spite of the United States inciting Brazil and India to criticise China's currency policy, Beijing need 'not worry too much' because it can defuse the tension through talks, according to Chinese officials.

Increasingly widespread calls for a stronger yuan are awkward for Beijing, which is accustomed to facing US pressure over its controlled exchange rate but has long tried to cast itself as the natural ally of other developing nations.

However, Brazil and India are unlikely to be any more successful than the United States in persuading Beijing to permit faster appreciation, researchers in Chinese government think-tanks said.

'They must realise that the root of the problem is not China but the United States,' said Chen Fengying, director of the World Economy Institute at the Institute of Contemporary International Relations in Beijing.

'Yes, we know India's inflation is high and Brazil is raising interest rates, but how can China's currency policy solve those problems?'

Critics accuse Beijing of giving its exporters an unfair advantage by keeping the yuan low, but the Chinese advisers said that an ultra-loose US monetary policy debasing the dollar was to be blamed for rising currencies in developing nations.

'Complaints from other countries (such as India and Brazil) add to the pressure over the yuan as they are key trading partners and China has to take them seriously,' said Song Hong, a senior researcher in the Institute of World Economics and Politics of the Chinese Academy of Social Sciences.

'However, China is unlikely to change its ways because of the additional pressure. When the United States pressed China, China explained itself to Washington, and China can do the same with other countries,' he said.

The BRICs, a term coined by Goldman Sachs in 2001 to describe the growing influence of large emerging economies, have been at the forefront in pushing for more clout in international forums for developing nations.

Reserve Bank of India governor Duvvuri Subbarao said in the week of 7 February that an artificially low yuan hurt his country.

And Brazil's newly elected President Dilma Rousseff, in part pressured by a relentless rise in the real local currency, has pointed to an undervalued yuan as a threat, flooding her country with cheap Chinese imports and eroding Brazil's export competitiveness.

On 7 February US Treasury Secretary Timothy Geithner visited Brazil where he urged Rousseff to do more to lobby Beijing to let its currency float.

'No matter if the pressure is from developed countries or emerging markets, the Chinese government is very unlikely to yield too much over the exchange rate issue,' said He Maochun, an international studies professor at Tsinghua University. - MercoPress                                       

*Third World Resurgence No. 245/246, January/February 2011, pp 18-19