By Doug Gray, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – It has been a volatile 2013 so far for Brazil’s currency, and indeed for Latin America’s largest economy as a whole. Last week, however, the susceptibility of the real to U.S fiscal policy was left wide open once more as the Federal Reserve took a surprise move and maintained their monthly stimulus levels of US$85 billion, just as recovery signs had suggested a cut of US$5-10 billion was imminent.

The real bounced back against the dollar and looks set to stabilize, Rio de Janeiro, Brazil News
The real bounced back against the dollar and looks set to stabilize, photo courtesy of SXC.

The reflex in Brazil was immediate, the real back to its strongest position since June, at which stage the currency was only halfway through a dramatic devaluing process that had taken it from a steady R$2 to the dollar up to R$2.40 within just three months.

“This indicates that the volatility [of the real] could be diminished”, the Finance Minister Guido Mantega told the press in response to the move, “which is very good for the business environment… But what we are interested in is stability. We don’t have an ideal baseline, but obviously R$2.40 is excessive and brings problems with it.”

It was that very same intervention from the Federal Reserve that Mantega had railed against as it excessively strengthened the real eighteen months ago, but the speed of the devaluation – down 23 percent on the start of the year back in August – was much sharper than that witnessed in other emerging markets. Mantega’s critics have once again been offered a perfect opportunity to question his ministry’s reactive policies rather than creating a solid plan from which to launch a considered economic strategy.

Brazil's Finance Minister Guido Mantega welcomed the Fed's decision not to cut stimulus, Rio de Janeiro, Brazil News
Brazil’s Finance Minister Guido Mantega welcomed the Fed’s decision not to cut stimulus, photo by Fabio Rodrigues Pozzebom/ABr.

The currency’s frailty is underpinned by a huge trade deficit, with the Central Bank’s figures for the first two weeks of September this year showing exports at US$5 billion compared to imports of US$9.2 billion. The short-term approach to guiding the world’s seventh largest economy, with a seemingly never-ending bout of interest rate adjustments to control inflation, has been coupled with huge levels of spending and lending.

It was hoped that President Dilma Rousseff would be the ideal candidate to maintain Brazil’s economic punch of the last decade, but she, too has had to rely on tax breaks and interest rate cuts to spur on growth as it hovered just shy of one percent last year. In 2010, economic growth stood at a robust 7.5 percent.

Mantega believes there are signs for optimism on the year as a whole, however, saying; “I am sensing a general recovery in the economy, and have seen confidence and production improving across several sectors. We were working on growth of 2.5 percent this year, but this shows it could yet be a little higher.”

The Federal Reserve is expected to maintain the stimulus package at current levels until it meets again in December to evaluate the long-term impact of their measures. Economic commentators indicate that the real looks set to steady at between R$2.20 and R$2.30 to the dollar as the year closes.


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