Brazilian Real (BRL) Being Held Tight by Government

on Oct 25, 2012

**Brazil’s “Dirty Float”**

In an interview forlocal business newspaper ValorEconomico,Brazil’s finance minister Guido Mantegahas reaffirmedthat South America’s largest economy is operating a “dirty float” exchange rate regime, in response to currency manipulation in other countries, The Financial Times reported on 24 October 2012.
Brazil’s recent adoption of the “dirty float” system has marked the end of the country’s earlier practice of allowing the market to determine the optimal level of the Brazilian real (BRL) and switched the control over the currency to the government. Under the new regime, Brazil restricts its real movement only within a tight band of between R$2-R$2.10 to the US dollar (USD). This decision has come after last year the BRL exchange rate approached R$1.50 to the US dollar, as foreign investors flocked to the country to take advantage of its strong economy and high interest rates. Forced by the same circumstances, other emerging markets, such as China and Colombia have also adopted the practice of artificial weakening of the currency.

Mr Mantegatold ValorEconomico on Tuesday (23 October): “Our system is a dirty float, like everyone’s. We could not sit there watching others appropriating our market and ruining our industry.”
**The Currency War**
!m[Brazil’s Finance Minister Guido Mantega Admits Government Hold Over BRL Exchange Rate ](/uploads/story/644/thumbs/pic1_inline.png)Last month, theUS Federal Reserve announced the launch of a new round of quantitative easing (QE3) by purchasing additional $40 billion in mortgage bonds per month to boost the labour market.That, combined with steps in Europe and Japan to fuel growth, created an influx of capital into emerging markets that caused currencies like the BRL to strengthen. In consequence, Brazil and other countries suffering dramatic currency appreciation accused their trading partnersof inciting a global “currency war” by adopting “protectionist” policies.

The Brazilian real is supposed to be a free-floating currency, but in the face of a “currency war” and growing concerns that BRL appreciation willdamage the country’s market trade and export competitiveness, the Brazilian government is not afraid to admit it has taken control over the currency. Mr Mantegasaid: “For us the ideal is a floating currency, without manipulation. But if the whole world is going to manipulate their exchange rates, we will too.”

**Policy’s Benefits Doubted**
Despite Mr Mantega’s confidence that the government has adopted the right system to protect its currency, some economist doubt the policy’s benefits for the domestic industry, stressing that the artificial weakening of the Brazilian real has only achieved a partial reprieve.
David Rees, an economist at Capital Economics in London, said that the Brazilian currency remained about 20 per cent overvalued in real terms despite 20 per cent depreciation from its recent highs. Meanwhile, the country’s economy had been slow to respond to the supposed stimulus provided by the weaker exchange rate, with growth continuing to be sluggish in the first half of the year.
“It’s pretty obvious that a line has been drawn in the sand at about R$2 to the dollar for some time,” Mr Rees said, adding that what was more doubtful was the extent of the benefits of the policy.


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