São Paulo – The depreciation of the dollar worldwide is causing fear in emerging countries such as Brazil regarding the new direction of international trade. By encouraging the decline in the value of its currency, the United States have already signalled that they intend to boost their exports and reduce their imports, which could significantly affect the economies of countries for which the largest market in the world is a major export target.
The vice president of the Brazilian Foreign Trade Association (AEB), José Augusto de Castro, explains that the depreciated dollar favours investment in the United States and helps the country generate employment in order for its economy to recover. This becomes more important in the United States in years of election such as this. However, it has consequences on the rest of the world. "This depreciation interferes with global trade and causes insecurity," says Castro.
Though encouraged by the United States government, the dollar depreciation process is also a reflection of a natural trend of the United States economy to become weaker. Similar to other economies, among them Brazil, the United States economy has more attractive interest rates (in Brazil the rate is now 10.75%), therefore investors end up migrating there with their dollars and causing the US currency to depreciate.
"Some emerging countries are attracting investment not only in bonds but also in infrastructure, a field in which they are appealing," claims the international and financial market economist at consultancy firm Tendências – Consultoria Econômica, Raphael Martello. Thus, the depreciation of the dollar is increasing in emerging countries. "With the exception of China, because it controls its exchange rate," explains Martello. "They keep the dollar at an appreciated level, but they have depreciated it slightly to curb inflationary pressure, very cautiously so as not to harm their exports," he says.
Martello believes that this is a time of global adjustment. "It is an adjustment that the countries must go through. The United States economy is not as powerful right now, so the currency tends to lose value," he claims. The governments of emerging economies, however, are working hard to prevent the dollar from dropping too much and their exports from losing steam. Such is the case with Brazil, whose Ministry of Finance has raised the Tax on Financial Operations (IOF, in the Portuguese acronym) on foreign investment in fixed income, in order to reduce the strong inflow of dollars, and is still considering further measures. The market claims that the measures adopted are already taking effect.
The countries believe this effort to be necessary because in addition to being strong manufacturers and exporters of commodities, especially in agriculture, the United States are also manufacturers and global suppliers of manufactured goods. Stronger exports from the United States in these fields would affect other producing countries. For the time being, however, the high prices of commodities are ensuring the export revenues of emerging countries such as Brazil.
Rising commodity prices are a consequence of the strong liquidity worldwide, because many investors are injecting funds into commodity-related financial assets.
As long as the prices of commodities remain high, economies such as those of Brazil and other South American countries will be fine, says Castro. "This is great for Brazil as it gives it a chance to generate more revenues, because Brazil is an exporter of commodities. There is a limit for these prices, though," warns the vice president of the AEB. Brazil exports lots of manufactured goods to South America, whose markets are producers of commodities, therefore they have power to purchase Brazilian products.
The high prices of commodities, however, also pose a threat, namely inflation. In this case, governments would have to raise interest rates, thus stifling global growth and bringing about the danger of recession.
The war started earlier on
Even though the term "exchange rate war" has only now become fashionable, Brazilian exporters claims that they have been experiencing its effects for some time now. Alfredo de Goeye, the president of Sertrading, one of the major trading companies in Brazil, explains that the company has but ceased to export milk, its main product in international trade. The pressure caused by the appreciation of the real (Brazilian currency) is being felt by the company for around a year, according to him.
Sertrading used to supply markets such as Latin America, the Middle East and Africa. "We have been gradually driven out of the market," he says, explaining that the company stopped exporting because it became unable to charge prices compatible with the market. As a result, Sertrading began working hard on another front, namely providing import services, especially for building material and machinery.
What about the euro?
In addition to causing losses in some countries, does the weakening of the dollar also lead to a shift in the currency that is the global market reference? The market does take this possibility into consideration, but specialists claim that it should not take place, mostly due to the lack of a successor. "The market is being cautious about it," says Martello, of Tendências. The euro, however, is experiencing a similar situation to that of the dollar, as European economies become weaker. "The euro has gone along with the crisis," he claims.
The Yuan is another option, due to the strength of the Chinese economy, but the country’s government has already signalled that it does not want this responsibility. China does not even allow international transactions to be made using its currency – with rare exceptions provided for in agreements. "There is no successor," says Martello.
*Translated by Gabriel Pomerancblum
