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Chile Echoes Brazil on Currency War as Unchecked Peso Surges

Chile’s ability to depreciate its peso is limited as developed countries and China fight “currency wars” that keep their exchange rates artificially weak, the Andean nation’s Finance Minister Felipe Larrain said in an economic forum yesterday.

The U.S. Federal Reserve announced last month a third round of asset purchases known as quantitative easing, or QE3, saying it will buy $40 billion of debt a month to boost the labor market. That, combined with steps in Europe and Japan to fuel growth, create an influx of capital into emerging markets that causes currencies like Chile’s peso to strengthen, Larrain said.

The peso has gained 7.9 percent against the dollar this year, the best performance among emerging markets behind Hungary’s forint. Chilean authorities are trying to contain the peso without intervening in the currency market by keeping a lid on public spending and are promoting the use of hedging, he said in New York. Still, the measures have limited effect.

“We can do nothing if the U.S. has in excess of $40 billion per month of quantitative easing,” he said. “I’m skeptical about QE and what it can do for the U.S. economy, but am also concerned about what it can do to my economy and our economies in the emerging world in what we can call sort of currency wars, where you’re caught in the middle of this fire.”

Larrain’s comments echo those of his Brazilian counterpart, Guido Mantega, who often rails against the impact of developed countries’ monetary policy and as China pegs its currency to an artificial rate.

Federal Reserve Vice Chairman Janet Yellen in defense this month said a stronger U.S. recovery would benefit the world and governments had tools to manage their economies.

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