Return of the currency wars

March 1, 2012

Maybe it never went away at all. But if the war was dormant, Brazilian President Dilma Rousseff certainly launched what appeared to be an opening salvo for a new round of battles – rhetorical ones for now.

Rousseff reached for some cataclysmic language to describe the recent appreciation of the real, which Brazil worries will crimp exports and hurt the domestic economy. The culprit, according to Rousseff, is an irresponsible “monetary tsunami” resulting from the ultra-loose monetary policies of rich nations like the United States.

Alonso Soto and Tiago Pariz offer some background in this Reuters article out of Brasilia:

Brazil has just taken fresh steps to defend itself in what it calls a “global currency war,” extending a tax on foreign loans to slow down a flood of capital that is strengthening its currency.

Analysts said the move was unlikely to have a major impact and the real <BRBY> actually strengthened in midday trade. Brazil’s central bank has also recently increased interventions in the currency market, buying dollars and selling reverse currency swaps to halt the real’s gains.

The real, considered one of the world’s most overvalued currencies, has gained more than 8 percent so far in 2012, making it harder for Brazilian industry to compete at home and abroad. The strong real is a top concern for President Dilma Rousseff, who is taking measures to protect local industries as she strives to ensure economic growth above 4 percent this year.

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