Brazil Caught Between Titans in Global Currency War

Brazil Caught Between Titans in Global Currency War

Brazil's Finance Minister Guido Mantega recently told the Financial Times that the global currency war "was absolutely not over," and cited two countries that, according to him, have not ceased the hostilities: China and the United States. More and more, Brazil seems to be caught between -- and battling against -- the greenback and the yuan in its efforts to slow the rise in value of its own currency, the real.

Part of the problem is due to the disparity in how the United States and China have bounced back from the 2008 global financial crisis. Economic recovery in the world's largest economy has been sluggish, causing the U.S. Federal Reserve to keep interest rates near zero to encourage borrowing. In a further attempt at preventing a double-dip recession, last year the Fed introduced a second round of quantitative easing, referred to as QE2, which was assailed by Brazil's technocrats as both useless and harmful to other countries.

For investors not satisfied with the low rate of return on U.S. debt -- or else concerned about its sustainability -- China and its focus on long-term growth would undoubtedly be a popular alternative. Interest rates there are high, while 10 percent annual economic growth is almost guaranteed. Unfortunately, the Chinese government keeps the yuan largely off limits to capital investment.

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