Whose currency can weaken fastest? But at what cost?


In Brazil they just conducted a swap operation to try and support t the currency as the Brazilian real moved to 2.16 intra-day lows before the operation.

[caption id="attachment_57260" align="alignright" width="300" caption="The Central Bank of Brazil"] Image courtesy Klebom: http://www.everystockphoto.com/photographer.php?photographer_id=44650 [/caption]

If they are in trying to support the currency now after spending the last 18 months trying to weaken, this is a bit of cruel irony for Finance Minister Mantega, President Rousseff, and the Brazil Central Bank.

Inflation which was not out of control is gaining momentum after a 9% move in the currency   in in two months.

Now while S&P rating agency and other credit agencies are lowering their outlook for Brazil the government's game plan is uncertain as the market ties their hands.

Rates must go higher and this will crimp the economy.

A quick look around core emerging markets and you can see runaway currencies robbing central banks of their creativity at a time when inflation is supposedly low but they can't risk spiraling imbalances.

In India the INR has moved to all-time lows against the U.S. dollar, and a basket at a time when lower inflation should be giving Indian policy makers plenty of room to reform policy to more market friendly plans.

What's going on? Emerging market currencies are caught in between policy that has been overly accommodative, growth that has ground to a halt, and capital flows that say, no thanks I don't need to be here, especially if rates are going higher.

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

This article appears in: Investing , International , Stocks

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