Brazil raises spectre of global currency war

Recent interventions into foreign exchange markets from Japan and China, combined with extreme devaluation in the US dollar over the summer, have one of the world’s biggest exporters crying foul and raising the spectre of an all-out currency war.

Brazilian Finance Minister Guido Mantega said Monday that global Governments are unfairly manipulating their currencies to improve export competitiveness, forcing Brazil to contemplate new taxes on short-term fixed-income investments and other measures to stem a rally in the real, the country’s currency.

“We’re in the midst of an international currency war,” Mantega said during a speech to a meeting of Brazilian industrial leaders. “This threatens us because it takes away our competitiveness.”

The comments come on the heels of the Brazil’s vow last week to use its sovereign wealth fund to weaken the real. Trading above US$1.71, the Brazil’s currency is near its 10-month high and is the world’s most-overvalued major currency, according to Goldman Sachs Group Inc.

Mantega said advanced countries including the United States, Europe and Japan are seeking to devalue their currencies in an intensifying trade competition. With the global economic recovery slowing in recent months, currency interventions have become a way for countries to weaken their currencies in order to boost exports and thus trade balances.

After talking tough for weeks, Japanese authorities finally intervened to sell yen on September 15. Last week, they said another intervention is possible.

Meanwhile, the United States has stepped up political pressure on China’s currency, the yuan, which many economists say is undervalued. Since China’s central bank in June said it would let the yuan fluctuate more freely, it has risen just 1.8 percent.

US Treasury Secretary Timothy Geithner said last week that the current level of the Chinese yuan continues to have an adverse impact on the US economy.

“It’s such a difficult game because the global economy needs the US to prosper and the US needs a weaker currency to help its growth prospects,” a currency strategist at Scotia Capital Markets of the posturing in recent weeks on FX markets Camilla Sutton said. “But as soon as you see it happen, other countries start to cry foul,” Sutton said. Since June 7, when the US dollar hit a high, the Australian dollar is up 19 percent against the greenback, the Swiss franc is up 18 percent and the Euro is up 13 percent.

Sutton said these are huge moves in a short time and noted such extreme volatility is difficult for exporters to handle.

David Pett, Financial Post with file from Reuters