Brazil Blames Cheap US Dollar and Not China for Global Trade Tension

Dollar and Chinese yuanBrazil is thinking about taking additional steps to limit gains in the local currency, the real, should advanced economies favor policies that keep their currencies weak, Finance Minister Guido Mantega said.

“We will take further measures if we don’t reach an agreement,” Guido Mantega said in New York. Last year, Brazil implemented a tax on foreign purchases of stock and fixed-income investment in a bid to stem the currency’s advance.

Mantega said he was “worried” after last weekend’s International Monetary Fund  (IMF) meetings in Washington, where officials from the US and other developed nations said they intend to keep their benchmark interest rates low.

Reduced lending rates can weaken currencies by prompting investors to shift their money to countries where rates are higher.

“I told my colleagues we won’t just watch the deterioration of our situation,”  Guido Mantega said. A stronger real would put Brazilian exporters at a disadvantage by making their goods more expensive in dollar terms.

After gaining over 30% last year, the best performance against the US dollar among the 16 most traded currencies tracked by Bloomberg, the real has lost 0.1 percent in 2010.

Brazil can’t rule out increasing levies on imported goods and will seek broader trade agreements with other emerging market economies to fight the excessive devaluation of the US dollar, Mantega said. He declined to say what specific measures might be taken.

Mantega added that an undervalued dollar, not the Chinese yuan’s peg, is the leading cause of worldwide foreign exchange and trade tensions. China fixes its currency at 6.83 yuans to the US dollar.

“Every time the dollar weakens, it causes foreign exchange imbalances in the world,” Mantega said. “This is worsened by the fact that the Euro is also undervalued and some Asiatic currencies are pegged to the dollar and therefore weaken together.”

Mantega said Brazil’s strategy is to coordinate a common foreign exchange strategy with the BRIC countries, which include Russia, India and China and anticipated he is planning to travel to China to discuss those issues.

He added that the Chinese trade balance as “more balanced now” and insisted China’s strategy of maintaining a weak yuan is a “defensive policy against the US dollar”.

In related news the IMF also supports the use of capital controls to help offset the excessive appreciation of currencies in some economies, Nicolas Eyzaguirre, the director of the Western Hemisphere department, was quoted in Washington during the IMF-WB general assembly.

Mercopress

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