In the middle of the global gloom and doom this week, at least one senior G-20 official was grinning like a Cheshire cat.

When the FT met him in Washington, Guido Mantega, the Brazilian finance minister and author of Brazil’s currency wars, was exuberant as his old enemy, the dollar, continued to gain strength against Brazil’s currency, the real. 

After months of currency controls and trade measures aimed at weakening the real and defending Brazilian industry, Mantega has finally been afforded some breathing space even if it is coming at the expense of the global economy.

“The real is today at R$1.85 [to the dollar],” he said, indicating that at this level, the government did not need to interfere further in the markets. “There’s nothing to be done.”

But even a triumphalist Mantega knows that the weak real has less to do with Brazil’s currency engineering and more to do with the dismal global economic outlook.

Brazil’s exchange rate is just one of a host of emerging market currencies to have been sold off. Reuters wrote on Thursday:

In the last seven weeks, the Korean won has skidded 12 percent lower while Russia’s rouble has dropped 13 percent versus its dollar-euro basket . Brazil has lost 14 percent of its value against the dollar this month, chalking up its biggest one-day falls since October 2008.

Any extended period of capital outflows would not be good for Brazil, which depends on foreign funding to finance its savings gap. Some believe higher prices for imports could also bring more inflation, which is already running at levels well above Brazil`s official target of 4.5 per cent plus or minus two percentage points.

But most economists are sanguine about inflation in an environment of weakening global growth. And there is not a strong link between inflation and the real, as Capital Economics economist Neil Shearing says in a note:

“The correlation between movements in the real and in inflation is actually fairly weak. This is not all that surprising. After all, Brazil is a comparatively closed economy – imports are equivalent to only 12 per cent of gross domestic product.”

Shearing concludes that Brazil will welcome a continued weakening of the real and will intervene mainly to ensure that any decline is orderly.

Yet Mantega remains on guard. With the Fed once again easing monetary policy this week, he is afraid that the weak dollar could re-emerge once uncertainty over the the eurozone finally settles down.

“It represents a strengthening of the quantitative easing policy,” Mantega said of the Fed’s moves this week. “So once we overcome this risk aversion, we may face again a process of the devaluation of the dollar.”

The real’s weakness may be good news. But if Mantega is believed, it is still too soon to return the troops to the barracks. Brazil`s currency war is far from over.

Related reading:
BRL: big fall, not going back up soon, beyondbrics
EM currencies: here we fall again, beyondbrics
Has the real touched bottom?, beyondbrics
Brazil will fight back against the currency manipulators, FT

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