The Economy 11/07/11
Brazil continues its defence in the ‘currency war’ while Mexico and the US formalise an agreement on long-standing haulage dispute.
The weakness of the US dollar has driven its exchange rate against the Brazilian real to its lowest point in 12 years.
On 1 July, US$1 bought R$1.558, making the real an attractive currency for investors. However, the capital inflow this generates simultaneously triggers inflationary pressures and undermines Brazilian export competitiveness.
In an interview with the Financial Times on 5 July, Brazil’s Finance Minister, Guido Mantega, emphasised once again that he would use all available measures to defend the real from the global ‘currency war’ which, in Mantega’s view, has arisen as a result of the artificial devaluation of the dollar by expansionary US monetary policy.
Mantega revealed that Brazil is preparing to implement additional measures to stem the damaging rise of the real, but added that these actions would not be pre-announced to investors. He also underlined that while the currency war is not over, Brazil’s growth is sustainable, inflation is falling and its fiscal deficit is decreasing.
On a similar note, Christine Lagarde, the new managing director of the IMF, stated this week that, along with the Greek debt crisis, excessive capital inflows to emerging economies such as Brazil were her immediate points of focus.
On 6 July, the US government signed and thus formalized a deal with Mexico which allows Mexican trucks to deliver goods across the US, thereby ending a 17 year dispute under the North American Free Trade Agreement (Nafta).
Mexican trucks had previously had to unload near the border, incurring an additional cost of US$150 per journey, adding up to US$674 million in fees per year—a cost generally born by the consumer. The deal should make Mexican goods cheaper and more easily available to the US supply chain.
In return, Mexico has dropped half of its retaliatory tariffs against US products (worth US$2.3bn per year) and will cut the other half once the US actually permits Mexican trucks to enter its territory. Mexican negotiators emphasised that they reserve the right to resume sanctions in the event of noncompliance.