Currencies: This week’s worrying global sign: Brazil turned money away. The imposition of a 2 per cent tax on inward portfolio capital inflows was an unorthodox response to a global problem.
As emerging market currencies gain ground against the super soft dollar, the prices of too many financial assets — stocks, property and other assets from Turkey to Brazil — are bubbling.
But one big currency, the fixed Chinese renminbi, isn’t appreciating. Brazil is just one of many emerging economies to find it is losing competitiveness to the Asian leviathan.
Brazil’s case is illustrative. It isn’t doing badly, it’s doing well. Its growth rate in the second quarter was 7.8 per cent in annualized terms. Its currency has risen by over a third so far this year against the dollar — and the rival renminbi.
Its stock market is up by 76 per cent so far this year — and by almost double that in dollar terms. To calm things down, the central bank might like to emulate its Australian counterpart and raise interest rates.
But higher rates attract capital and risk driving the real up still further.
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The Brazilian central bank has already been doing all it can to hold the real back. It has bought enough dollars to become the fourth biggest holder of US Treasuries.
But its orthodox efforts haven’t worked — and the unorthodox one isn’t likely to either. The 2 per cent tax initially hit Brazil’s stocks and currency, but the strengthening trend could easily resume.
Still, other countries could emulate Brazil’s step. South Africa is rumoured to be considering the idea.
And many emerging economies will keep adding to their reserves to try to stem the dollar’s fall.
Their collective efforts may help prop up the dollar. But the efforts look doomed to be mere palliatives until the US and China both change their policies. The US should begin to raise rates and China should let its currency appreciate.
Neither seems willing to act yet. Until they do, the global economy’s distortions — deflated developed economies, robust emerging ones and super-inflated assets almost everywhere — risk getting worse.
That raises the spectre of another round of intense financial instability and capital losses.
