Thursday, October 7, 2010

Brazil Warns That U.S., Europe and China Are Creating Serious Distortions With Their Policies

Henrique Meirelles, Brazil's Central Bank president, said today at a hedge fund meeting in Miami, that a combination of U.S. policy, the European economy and China's fixed exchange rate has led to major distortions in the currency markets.

Meirelles said that historically low interest rates in the U.S. and adopted quantitative easing by the U.S. Federal Reserve led a lot of liquidity, weakening the dollar against other currencies. At the same time, there is an excess of liquidity flowing into countries like Brazil, as debt problems in Europe have pushed the euro down and China continues to control its currency.

According to him, the situation becomes more complex when several countries are taking steps to protect their own markets.

"This can create tremendous distortions. I think this is a serious problem,"  "everyone should let their currencies float."

Meirelles also said that Brazil's CB is taking steps to prevent the financial liquidity from leading to excessive leverage in the Brazilian economy and to prevent asset bubbles. In addition to conducting two auctions to buy dollars per day, the central bank raised its benchmark interest rate to 10.75% recently. "This is not necessarily the ceiling," Meirelles said, without giving any indication of the deadline for potential new tightening..

On the recently launched Brazil's sovereign fund, the chairman of the Central Bank said its investment policy has not been decided. "There was only one board meeting," he added.

He also said that the Brazilian monetary authorities are working to adopt the Basel Agreement of financial regulation and monitoring all three types of credit risk in the Country

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