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Brazil Warns of 'Currency War'

Guido Mantega, Brazil’s finance minister, said on Monday the world was in an “international currency war”, in a further sign that Brazil is preparing measures to prevent further appreciation of its currency, the real.

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Mr. Mantega, who has made increasingly aggressive comments recently about the need to control Brazil’s currency, said governments around the world were trying to weaken their currencies to promote competitiveness.

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” he said, according to Reuters.

The US dollar has fallen by about 25 per cent against the real since the beginning of last year, making the real the strongest performing currency in the world, according to Bloomberg.

In spite of Mr. Mantega’s strong words, however, Brazil has so far held back from taking any action other than intervening in the local currency spot market.

The central bank bought as much as $1 billion a day for much of the past two weeks — about 10 times its daily average in recent months — but this was largely to absorb money entering the country to take part in last week’s $67 billion share issue by Petrobras, the national oil company.

“There’s a real gap between the rhetoric and the action,” said Tony Volpon, head of emerging market research for the Americas at Normura Securities in New York.

He said central bank intervention was having little impact beyond reducing volatility in Brazil’s foreign exchange market. It resulted in making the real even more attractive for foreign investors, keen to make earnings on the spread between Brazilian government domestic debt, paying at least 10.75 per cent a year, and the cost of borrowing dollars internationally, currently about half a percentage point a year.

Mr. Mantega recently said Brazil’s sovereign wealth fund was preparing to make “unlimited” dollar purchases to prevent the real appreciating any more.

Many analysts also expect the central bank to use currency derivatives known as reverse swaps to contain the real’s rise, a tactic it has turned to in the past but has not used for about 18 months.

Other options open to the government include raising a financial transactions tax on portfolio investments. The 2 per cent tax was introduced last October, partly to counter the effects of inflows following an $8 billion initial public offering of shares in Spanish bank Santander’s Brazilian unit.

Many analysts said a similar move could be expected following the Petrobras share issue, although they also say this is unlikely before Brazil’s general elections this weekend.

“If the government continues not to act, then investors will go on testing it and bring more money to Brazil,” Mr. Volpon said.