Brazil Accuses the U.S. of Starting a Currency War

Guido Mantega is Brazil’s finance minister. He is currently criticizing the U.S. Federal Reserve’s actions in rolling out more quantitative easing. Quantitative easing is an unconventional monetary policy whereby a central bank begins to buy assets from commercial banks using newly printed money. The U.S. Federal Reserve announced last week that it would begin buying mortgage backed securities and would continue to do so for the rest of the year until the labor market improves. This would come out to about 85 billion dollars a month for the rest of the year.

 

Mr. Mantega states that the purpose of these purchases is to introduce a certain amount of new money into the economy in order to lower the value of the U.S. dollar. By lowering the value of the dollar, American exports would become more affordable to people in other countries and thus boost U.S. exports.

 

As a result of this, Japan has also begun following the United States in trying to keep their currency weak by expanding their own quantitative easing program. The global tensions that are developing as a result are what Mr. Mantega is calling a currency war, where multiple nations begin to purposely lower the value of their currency in order to boost exports. This kind of manipulation negatively affects emerging markets like that of Brazil by forcing appreciation of Brazil’s currency value. For example, 2 years ago during the second round quantitative easing from the Fed, a wall of money was pushed abroad and Brazil’s currency was forcibly appreciated thereby negatively affecting its exports. The currency of Brazil is called the “real”. If these quantitative easing methods work this time around for the U.S. and Japan, then Mr. Mantega feels that Brazil will be forced to implement measures that would stop the real from strengthening.

 

My questions is that given the fact that these economic policies are purposely made to have global repercussions and could substantially negatively affect the economies of other nations, should there be the freedom to take these economic measures, labeled as currency wars, without any kind of oversight or sanction from the international community?

 

Sources: Financial Times

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