Brazil central bank commits $60bn to prop up currency

Brazil’s central bank has announced a $60bn plan to prop up the value of the national currency.

According to a British Broadcasting Corporation, It comes as the Brazilian real nears a five-year low against the US dollar.

The real and other emerging market currencies have fallen steadily over the last three months on speculation of higher US interest rates.

The central bank said it would spend $500m a day on Mondays to Thursdays and $1bn on Fridays buying reais in the currency markets.

The Monday-to-Thursday interventions will target currency swap markets – financial derivatives used by companies and investors to hedge their currency exposure – while on Fridays, the central bank will buy the national currency directly in return for US dollars.

The interventions will run up until December.

“This shows the firm determination of monetary authorities to keep the exchange rate from slipping further,” said Andre Perfeito, chief economist at Gradual Investments in Sao Paulo.

It is the first time the central bank has pre-announced daily interventions in this way since 2002 – a time when markets were speculating over a possible Brazilian debt default, following the financial collapse of neighbouring Argentina and with the imminent election of President Luiz Inacio Lula da Silva.

The weaker currency is raising the cost of imports, which in turn increases the cost of living for Brazilians and raises concern that inflation could get out of control.

It’s a response to something that hasn’t even happened yet. Currencies across the emerging markets have been under the cosh because the US Federal Reserve is rolling up its sleeves and getting ready to… well, to stop doing something.

The Fed will at some stage reduce the $85bn a month it’s pumping into the markets. Already the mere expectation is reducing the flow of cheap money to emerging economies and it will have far-reaching effects on their international trade and financial markets.

Indonesia has also announced new measures – tax changes to stimulate exports and reduce imports.

The responses will vary from country to country, but the impending changes at the US Fed are now the big challenge for many emerging economies.

And, bizarrely you might think, it’s all because the US economy is gradually getting stronger and has less need of the Fed’s strong medicine.

It could also put pressure on any Brazilians who have taken on large debts, particularly if the debts are denominated in foreign currency.

Brazil and India have been at the brunt of the recent change in market sentiment, with the real down 16 per cent against the dollar since May.

Both countries benefited from inflows of foreign money over recent years as investors and speculators have been able to borrow cheaply in the dollar.

That process now appears to be unwinding, as the long-term cost of borrowing rises on speculation that the US Federal Reserve is preparing to curtail its monetary stimulus programme, perhaps as soon as next month.

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