Tuesday, October 19, 2010

Currency Wars Escalate Worldwide: Brazil Fires New Shot, Tells Others To Stop Devalueing

As Brazil raised its benchmark interest rate to 10.75%, the highest of the G20, contain inflation (something Bernanke dreams of), its currency has appreciated tremendously in recent months. Speculators and big money funds are borrowing from Japan or from the fed at virtually zero rates, and then earning interest in Brazil.

Well, Brazil fired a new shot by raising inflow taxes, its IOF went to 6%, and added it may be forced to take additional measures. Brazil also closed a loophole and boosted the levy on money brought into the country to make margin deposits for transactions in the futures market to 6 percent from 0.38 percent.

Finance Minister Guido Mantega called for an end to the worldwide currency wars, the move by the US to devalue its currency, with China pegging the Yuan to it.: “This currency war needs to be deactivated,” “We have to reach some kind of currency agreement.”

Worldwide Escalation
South Korea also announced further measures to counter capital inflows that it blames on low interest rates overseas.

Bloomberg reports that Indonesia’s "central bank said it plans to offer term deposits with longer maturities of three months, six months and nine months as it seeks to reduce volatility in the rupiah".

"Mantega cited the Plaza Accord of 1985, when governments agreed to intervene to devalue the U.S. dollar against the yen and the German deutsche mark, as the kind of agreement that might be required. International policy makers failed to narrow their differences on intervention in currency markets during the International Monetary Fund’s annual meeting this month".

The higher inflow tax applies to fixed-income investments, local equity funds, hedge funds and pension funds..


Reactions are varied to the new measures

Arminio Fraga, former central bank president says "The taxation on foreign purchases in Brazil may provide a temporary relief but won’t do the job,”.

Barclays Capital, however,  says "the latest tax increase may succeed where the first one failed. The higher levy will only affect new flows of money into the country, not deposits already in Brazil".  “We believe this time will be different,” “With this new IOF tax hike, the government is signaling that it will do whatever it takes to prevent the Brazilian real from appreciating.”

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