Tiago Pariz in Brasilia also contributed to this post.
Brazil’s Trade Minister Fernando Pimentel was the latest authority this week to fire warning shots in a resurging currency war. The government is “focused” on keeping the real at its current level of 2 per U.S. dollar, he told journalists after a meeting with fellow ministers and businessmen.
Using market rules, we are going to try to keep (foreign exchange) rates steady every time the currency is under attack.
These words came days after Finance Minister Guido Mantega admitted Brazil now has a “dirty-floating” regime. “We cannot continue watching as others take ownership of our market and bring down our industry,” he told a local newspaper.
That doesn’t mean creating a formal framework to return to a fixed-rate regime, as Brazil had in the 1990′s. But just how dirty is this new regime? The exchange rates speak for themselves. Compare the real with the Chinese yuan:
Brazil was a paradise for hot money until a few years ago, paying sky-high interest rates for relatively low-risk bonds. Massive inflows turned the real into the world’s most overvalued currency last year, according to the Economist’s Big Mac index.