‘Currency War’ Threat to Brazil’s Real

By Doug Gray, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – As its economy goes from strength to strength and the dollar continues to weaken, this week Brazil’s government announced record imports of US$17 billion for the month of September, whilst Finance Minister Guido Mantega warned of a heightening currency war as a result of foreign money pouring into the country.

Exports for the same month were also up, however, to almost US$19 billion. “Whilst we sell raw materials abroad, we buy manufactured goods from the same markets,” explained Welber Barral from the Foreign Business Development Ministry.

Exports to China alone, currently Brazil’s biggest trade partner, grew 33.6 percent up to the end of September 2010 according to figures released in Agência Brasil.

Barral has been pointing an accusatory finger towards Asian countries including China and Japan who are seeking to devalue their exchange rates and give themselves an edge over Brazil in exports to countries like the USA.

“Besides the problem of rising prices of domestic products, there are countries that intervene in foreign exchange, competing with Brazil,” he said.

According to Barral the government is studying measures to tackle the global devaluation of the dollar, set to be announced later this year. Regarding artificial exchange rate policies adopted by some countries, he said that Brazil will take the subject for discussion at the G-20 summit scheduled for later this month in South Korea.

Several other countries, including Mexico, Peru and Colombia are also exploring possible measures to help curb their currency’s increasing escalation. The investor’s dollars currently flooding into Brazil in particular is aiming to capitalize on interest rates of up to eleven percent, considerably more attractive than the tumbling rates to be found in the West since the financial crisis.

The huge Petrobras share offer has been yet another sponge for international funds, and the fear is a return to the bad old days of inflation as Brazil struggles to stem the flow.

Goldman Sachs had already labeled the real the world’s most over valued currency, an unwelcome tag for any country but one being taken advantage of by millions of Brazilians buying up dollars and Euros and traveling overseas in droves.

Should the government take steps to weaken its currency it will come as some relief to the hundreds of thousands of tourists preparing to make the opposite journey to South America for Christmas and Carnival.