Friday, April 8, 2011

Bravo for Brasil


Brasil yesterday apparently gave up its quixotic quest to keep its currency from appreciating against a weakening dollar. Why follow the dollar down to the inflationary depths, when you can keep your currency stable against other currencies and minimize the impact of rising dollar-denominated commodities?

On balance, as the chart above shows, the real is the same today against the dollar as it was 12 years ago in 1999. (This is a milestone in itself; who would ever have thought the real could go 12 years without a devaluation against the dollar?) That would ordinarily be very good news for Brasil, except that the dollar has lost over 25% of its value against other currencies during that period. So the real has suffered equally (and this fact should be shoved in the face of any exporter who claims he has lost competitiveness as a result of the real's strength), but at least now those who invest in Brasil know they don't have to accept the fate of the dollar if it continues to decline.


The way is now open for Brasil's stock market to reach new all-time highs, both in real and dollar terms. I note that Chile's peso has also been strengthening against the dollar of late, and Argentina's peso has been a lot stronger against the dollar than its relatively high inflation rate would suggest. Even Mexico's peso has been appreciating against the dollar this year. Bully for them, and shame on the U.S. Fed. Oh, and by the way, this should be good news for emerging market debt and equities. Stronger currencies are always better than weaker currencies, since they reflect and encourage confidence in their countries, and that in turn promotes investment, growth, and prosperity.

1 comment:

Benjamin said...

I want to believe in the Brazilian miracle, I want to believe...but doesn't every Latin American nation blow up amid corruption, too much government dependency and short-term thinking?

I hope Brazil is different.

And I hope the USA is not now part of Latin America.