Brazil Real Weakens After Hint of Market Intervention

Posted January 13, 2010

The Brazil real weakened as the central bank hints at market intervention. The Mexican peso strengthened as industrial output contracts at a slower rate than predicted. The UK pound strengthened against the US dollar as the Bank of England mentions possible interest rate hikes in 2010. Venezuela is pursing market intervention policies. The US dollar rose against the Japanese yen.

 

The Swiss were the first to threaten currency intervention to stem money appreciation, but now Brazil has followed suit. Brazil’s real weakened against the US dollar to 1.7590 real as the central bank indicated it might sell debt to generate cash needed to slow real appreciation.

Just the concept of debt selling led to a slowing of the currency’s rally which was the goal.

In Mexico, the probability that growth will soon resume led to a stronger peso. The government reported that manufacturing fell at a slower rate than predicted by economists. Mexico’s economy parallels the US economy in certain ways because 80% of the country’s exports are destined for the US. Mexico’s peso has been lagging behind other emerging market currencies as unemployment remains high in the US.

The Mexican peso strengthened against the US dollar to 12.7427 pesos per dollar. The peso has risen by 2.8 percent so far this year.

It seems the time has come for the UK to seriously consider interest rate increases. A key component of the stimulus program has been record low interest rates. But the Bank of England has indicated it may begin to discuss the appropriate interest rate increases to be implemented this year.

The UK pound strengthened against the US dollar which would be expected with talk of interest rate hikes. Investors have been turning more to emerging market currencies seeking higher yields on their money. The UK pound rose to $1.6273 against the US dollar.

UK sterling also rose to 88.98 pence per euro.

Signs of continuing economic recovery and rising commodity prices are prompting the Bank of England to look at its stimulus programs. A policy of quantitative easing has been in place and it appears close to ending.

Venezuela has been in the currency news the last week as President Hugo Chavez continues his plan to strengthen the bolivar in the unregulated currency market. The current goal is to reach 5 bolivar per US dollar as the government auctions dollar-denominated securities. Currently it is 6.10 bolivar per US dollar.

Venezuela has been facing a growing budget deficit. In addition there has been a flow of US dollars out of the country. Chavez set two dollar exchange rates: one for essential food and medicine and one for non-essential items.  The current currency policy of rate manipulation will have a negative impact on US businesses with operations In Venezuela. Some US congressmen are proposing to use Venezuela as proof there is need for legislation allowing the US to impose duties on imports from countries that manipulate their currencies.

The US dollar rose to 91.35 yen. The Australian dollar also strengthened against the yen to 84.22 yen.

 

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