Brazil Enters Currency War

With announcement of second stimulus dubbed as QE2 of $600 billion by the US’ Federal Reserve, Brazil’s entry into the so-called currency war, the term coined by the IMF director Dominique Strauss Khan. Brazil is the first country to criticize the move by the Federal Reserve, which stated that the second stimulus was aimed to stimulate the slowing GDP growth. It said it would implement the package over next eight years through buying government bonds.

Competitive Advantage

But, Brazil sees the Fed’s move as a step to devalue the Dollar to inflate the competitive advantage of the US’ exports over others. Brazil’s concern is that the money injected into the US’ economy would flow to the emerging market economies (EMEs) seeking higher returns, thereby pushing their currency values that would result into reducing the competitive advantage of exports from the EMEs.

China Cautious

China reacted cautiously on November 5 saying that it would not go on record for or against the Fed’s move, but said the debate highlighted the need for reforming the international financial system. It added it can understand the US concern of slow growth. Chinese central bank officials met regularly with their Fed counterparts, and the Americans gave detailed explanations for the monetary changes, the central bank chief Zhou Xiaochuan said on Friday.

Currency War Leads to…

Brazil’s finance minister Guido Mantega said, “It’s no use throwing dollars out of a helicopter. The only result is to devalue the dollar to achieve greater competitiveness on international markets.” The President-elect Dilma Rousseff said in a joint press conference with the outgoing president Lula Da Silva, “The last time there was a series of competitive devaluations… it ended in world war two,” (Emphasis not added). Brazil’s currency the Real rose 39 percent against the dollar since the start of 2009. Brazilian industrial exports are said to be hurt due to strengthening of the Real against dollar.

It is quite interesting that the US, which has been severely critical of Yuan’s pegging to the dollar and rallied international campaign to force China to allow Yuan’s appreciation, has now come under scrutiny for the same reason. It seems the IMF Chief’s expectation of “currency war”, though he denied it saying as explicitly as it sounded, has already begun.

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