“US interest rates are near zero, UK interest rates are near zero, Japanese rates are near zero and Brazilian rates are 12.25 per cent – I would say that’s the crux of the matter,” said Neil Shearing of Capital Economics in London.
Brazil fears economic fallout as real soars
By Joe Leahy in São Paulo
The Brazilian real soared to a 12-year high against the dollar on Friday, reigniting Brazil’s currency war fears and worsening the economic problems for Dilma Rousseff, president.
The real traded at a high of 1.5523 versus the US currency, its strongest level since just after it was first floated in 1999, as investors sought higher-yielding assets following the easing of the Greek debt crisis.
Brazil’s rapid economic growth and high real interest rates at nearly 6 per cent make its markets a powerful draw for foreign investors starved of investment opportunities in developed markets.
“US interest rates are near zero, UK interest rates are near zero, Japanese rates are near zero and Brazilian rates are 12.25 per cent – I would say that’s the crux of the matter,” said Neil Shearing of Capital Economics in London.
The relentless strengthening of the country’s currency is a headache for the administration of Ms Rousseff, which is concerned that it is reducing the competitiveness of the country’s industrial sector.
Brazil has been a vocal critic of ultra-loose US monetary policy, known as quantitative easing, which it has blamed for pumping liquidity into the global economy.
The US Federal Reserve this week ended its second round of bond-buying, dubbed QE2.
Much of this liquidity, Brazil has argued, found its way into emerging markets, such as those in Latin America, inflating asset prices and forcing governments to implement defensive capital controls.
But with the end of quantitative easing, the government will have to look for other reasons for the rising strength of the real.
Central bank data show that foreign direct investment and higher commodity prices have accounted for most of the dollar inflows this year, rather than speculative investments.
About $42.4bn flowed into Brazil between January and April this year, more than five times as much as the same period last year. Only about $7bn of this was destined for the fixed income market.
In addition, Japanese households remain firm buyers of Brazilian assets, with about $4bn flowing into Brazil from retail investors there every month.
The government has been willing to let the currency strengthen in recent months to combat rising inflation but any further appreciation will prompt opposition from Brazil`s powerful industrial lobbies.
Ms Rousseff, a development economist, came to office with promises to reduce interest rates but has had her hands tied by the rising inflation rate.
Mr Shearing said the real effective exchange rate of the Brazilian currency against the dollar had strengthened 12 per cent since its pre-crisis high.
Much of the currency’s strength has come from record commodity prices, which have helped limit the current account deficit to about 2.3 per cent of gross domestic product in May.
“If you kept level of imports the same and put commodity prices back to 2005 levels, we reckon the deficit would be close to 5 per cent of GDP, which is getting close to danger territory,” said Mr Shearing |
