Last Thursday, Brazil’s central bank suddenly acted to halt the currency’s slide, stressing growing concern among officials that the global financial crisis is damaging Brazil’s economy and could cause a potentially destructive shoot in inflation.
The bank’s decision to sell 2.75 billion dollars in currency swaps — a move that pushed up the Real — marked an unexpected shift in strategy for a government that has complained for the past year about a “currency war” that left the Real highly overvalued compared to its neighbors.
Nonetheless the Real’s enormous and sudden depreciation, which has pushed it down 17% against the US dollar this month to levels not seen in two years, was in fact too much for the central bank to bear.
President Dilma Rousseff, speaking while on a trip in New York, explained that while Brazil’s economy is well-equipped to face the global crisis; but added that the government was ready to take additional measures to avert further abrupt moves in the currency.
She said although things are going to stabilize, the government is ready to take more measures, if necessary. Brazil is in many ways become a casualty of the crisis, which is centered in Europe and the United States. The crisis has punished currencies in quite a few emerging markets as investors seek safe haven.
Officials on the other hand are concerned about the impact of the falling Real on inflation, which is already well over the government’s target range. A weaker Real may cause the prices of imported goods to climb, even though the depressive effects of the global crisis should also keep a cap on inflation.
This was a sudden change in fortune for a currency that just four weeks ago was trading approximately the 1.55 per dollar mark and had Finance Minister Guido Mantega threatening further measures to keep the currency from strengthening.
It is expected that the depreciation of the Real may end up helping manufacturers, who have mainly missed out on Brazil’s economic boom in recent years as a result of the overvalued currency.
Still, economists warn that the suddenness of the Real’s fall could harm Brazil by punishing companies that have borrowed in dollars and by upsetting the financial variables underpinning Latin America’s largest economy.