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Emerging Markets Have Already Lost ‘Currency War’

Oct. 19 (Bloomberg) -- Emerging-market countries have already lost the global currency war and attempts by Brazil and others to prevent appreciation will have a limited result, according to Societe Generale SA, France’s second-biggest bank.

“They’ve lost the war before it’s even started,” Gaelle Blanchard, a London-based emerging-market strategist at Societe Generale, said in a telephone interview. “Money wants to go somewhere and the yield is in emerging markets. You can’t stop that unless you can also stop broad-based dollar weakness.”

Brazil stepped up efforts to curb gains in the real yesterday by raising its so-called IOF inflow tax to 6 percent from 4 percent to protect exports from what Finance Minister Guido Mantega on Sept. 27 called a global “currency war.” Interest rates near zero in industrialized nations have encouraged investors to borrow cheaply there and invest in higher-yielding emerging markets including Brazil, where the central bank rate is 10.75 percent, the highest in the G-20.

The Brazilian real and South African rand have gained 37 percent and 36 percent versus the dollar, respectively, since the start of last year, making them the two best-performing emerging-market currencies in that period. South Africa’s central bank rate is 6 percent.

The real has appreciated 1.4 percent versus the dollar since Oct. 4, when Mantega doubled the IOF tax, a levy on foreign investment in fixed-income securities, to 4 percent. The rand traded 0.6 percent weaker at 6.9155 per dollar as of 1:01 p.m. in Johannesburg, from a previous close of 6.8724, trimming the South African currency’s gain in the past two weeks to 1.5 percent.

‘Kind of Failure’

“Brazil has been very vocal and has implemented measures to limit currency appreciation, but it’s been a kind of failure,” said Blanchard. “It might have slowed the move in the real but it hasn’t made it weaker.”

The risk of keeping interest rates lower for longer as economic growth picks up is that it may cause “asset price bubbles,” said Blanchard. “There isn’t an easy solution,” for emerging markets, as “the solution is really in the dollar and the U.S.,” Blanchard said.

Speculation that the U.S. Federal Reserve will keep interest rates near zero for longer and increase purchases of government debt, a process known as quantitative easing, has boosted emerging currencies.

‘Small’ Player

U.S. Treasury Secretary Timothy F. Geithner said yesterday that his nation “will not engage” in currency devaluation. That suggests it is uncertain whether further quantitative easing will occur, said Blanchard.

South Africa is a “small” player in the global currency war and doesn’t have the resources to influence the value of the rand, John Cairns, head of foreign-exchange research at Johannesburg-based Rand Merchant Bank, wrote in a client note yesterday.

“What we are seeing is as much dollar weakness as it is rand gains and there is nothing that the South African Reserve Bank can do to support the dollar,” Cairns wrote.

To contact the reporter on this story: Garth Theunissen in Johannesburg

To contact the editor responsible for this story: Gavin Serkin at

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