Brazil is a victim of its economic success. This year its trade-weighted currency has appreciated by 23 per cent, in real terms. Since Luiz Inácio Lula da Silva became president in 2002, it has risen by 62 per cent. This is novel for a country usually associated with debt crises and devaluations. It is also an increasingly serious problem.

One important question is whether the real’s continuing strength is due to a kind of incipient Dutch Disease, driven by Brazil’s huge commodity wealth, or an overabundance of footloose international capital. If the latter, as the government claims, there may be a case for policy action. Hence Monday’s 2 per cent tax on portfolio capital inflows – although few expect the measure to have much long-term effect. A 1.5 per cent tax introduced in March last year, and dropped shortly after Lehman collapsed, did nothing to stem the real’s rise last year.

On the other hand, if real strength is due to a permanent shift in Brazil’s terms of trade, there is little that government can do. An overvalued exchange rate may lower competitiveness and hollow out local industry. But the best response to that is higher productivity. In the past, extreme volatility made it hardly worth chasing small productivity gains. Brazilian companies focused on survival instead. Now they will have to tighten the screws. Taxing foreign capital will not help them do that. On the contrary: it will increase their funding costs.

At least a strong real makes Brazilians feel richer, a political boon ahead of next year’s elections. Still, you can have too much of a good thing. With the economy forecast to grow 5 per cent next year, interest rates are expected to rise soon. Indeed, the tax may ease the way for higher rates, by trimming the arbitrage on carry trades funded by zero interest rates elsewhere. By the same token, smaller inflows now mean smaller outflows when the US eventually tightens policy. Such pre-emptive action is a promising sign of Brazil’s financial coming of age.

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