Brazil gears up for the next round of currency wars

By Emerging Money>,

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An overly strong local currency has been a structural problem for Brazil -- except, of course, when the real has been too weak for the government's comfort. It looks like the situation is getting ready to reverse again.

From the start of the year to last week, the real surged 8.6% against the dollar, returning to roughly the level the Brazilian currency traded at in late October .

While the real has since given up 2.5% so far in March, it is largely because traders are buzzing that the most recent swing to the upside has gotten the Brazilian government ready to once again raise the currency walls and shut out foreign money.

This time around, the measures on the table include calling in short-term credit lines early, sucking that liquidity out of the market -- and out of foreign traders' clutches.

They are also reportedly looking into cutting off lending from foreign companies into Brazilian subsidiaries in order to turn off that particular spigot through which cash can enter the country.

The underlying problem is that while Brazilian interest rates have declined significantly in the last year, they are still well above what lenders can hope to receive in North America, Europe or Japan. This has made the country a haven for global capital, driving up demand for reais and so pushing the local currency's relative value upward.

While many countries encourage strong currency policies, Brazil and other export-driven economies have suffered when their currencies get too strong.

The strong real last year sapped the profits of exporters like Vale (VALE, quote) and made local manufacturers like Gerdau ( GGB , quote ) and even Petrobras ( PBR , quote ) less competitive on a global scale -- and that in turn dragged on the Brazilian stock market ( EWZ , quote ).

As this develops, look to see the WisdomTree ETF that tracks the Brazilian real ( BZF , quote ) in play.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
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