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Brazil Steps Up Intervention to Support the Real: Reflections on Currency Wars

Winning currency wars is easy. As with trade wars, one may not care for the end result.

Brazil’s central bank bolstered efforts to shore up the currency after it tumbled to the weakest level since former President Dilma Rousseff’s tumultuous impeachment in 2016.

The real has weakened 12 percent since the end of March, the worst performance among 16 major currencies tracked by Bloomberg, as investors grow concerned that October elections could usher in a new president less attuned to investors and business. Fear that moves seen as key to fixing fiscal problems would be derailed have exacerbated what’s already been a lackluster year in emerging markets. The real fell 0.9 percent to 3.7791 per dollar as of 11:55 a.m. in New York, and earlier reached 3.8056, the weakest since March 2016.

Brazil Declares Currency War

Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax.

What a Hoot

Note the irony. The Brazil currency war was really about trade.

This was my comment at the time: "Mathematically speaking, the desire for every country to be net exporters is impossible. Massive trade wars are on the horizon as a result."

Success!

My comment then was: File this story in the category of "be careful what you wish for, you just may get it".

Success Not Wanted!

What the hell happened to "When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil."

Today we see that success was not wanted. Fancy that.

Brazil is now desperate to prop up the value of its currency.

Forex Intervention Is Stupid

I have another message for Brazil: Direct Forex intervention is stupid.

Why? Because direct intervention wastes foreign reserves badly needed to purchase foreign goods. In effect, Forex intervention serves to weaken a currency.

If you don't believe so, carry things to the logical conclusion: Suppose Brazil used all of its currency reserves to prop up the Real. What then? How would Brazil pay for imports from the US or EU? And what about loans taken out in US dollars or Euros?

The only effective policy is to raise interest rates, or better yet, let the market set them.

Message for Trump

Winning trade wars is similar to winning currency wars. Spectacular success will not look so good when you get it.

Mike "Mish" Shedlock

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