Which way is the real headed, Mr. Mantega?
Part of the problem is the whop-jawed global economy. The world’s largest economy has been slow to recover from the 2008 global financial crisis, causing the US Federal Reserve to keep interest rates near zero to encourage borrowing. In a further attempt at safeguarding against a double-dip recession, last year the Fed introduced a policy of quantitative easing, QE2, which Brazil’s technocrats have variously assailed as both useless and harmful to other countries.
China would undoubtedly be a popular alternative for global investors. Interest rates are high in China, 10 percent annual economic growth is almost a guarantee, and the authoritarian government has a long-term focus. Alas, the Chinese government keeps the yuan largely off limits to capital investment.
Enter Brazil. Recently dubbed “the un-China,” Brazil is open to portfolio investment, and it has a problem with inflation that the central bank is trying to get on top of by setting a high policy rate of 12.5 percent. As a result, capital in search of high returns has flooded into Brazil. The cost of fighting inflation is a strong currency.
For more on the real, including the Rousseff administration’s efforts to bring the currency in-line, and to read my policy recommendations for alleviating Brazil’s currency conundrum, check out Real Clear World.
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