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Brasil Currency

In: Business and Management

Submitted By sonalshah86
Words 760
Pages 4
1. What would happen if Brazil allowed the real to float freely in FX markets:

a. Immediately
If the government did not intervene to weaken the real to around R$2, I suspect the real would be much stronger. This would propel imports and also capital inflow into the country due to the high interest rates. Since the government wanted to make Brazil competitive for exports, a weak currency would dissuade companies from exporting since they would earn less in revenue for every $ exported. Further with a free currency and no capital controls, the ease of investing and removing capital would make the Brazilian stock market (which as it is, is very small) more susceptible to foreign capital.

b. Medium term (1-2 years)?
In the medium term, the movement in the real would dependent on several factors such as: global sentiments, status of the euro crisis, relative attractiveness of other market (such as Mexico, Africa, South East Asia) etc., However it would be ideal if the real was stable in the range of R$2 +/- 10% This would ensure stability in the economy and capital markets. A strong currency would encourage imports while a weak currency would discourage investments. Further a weak currency would also make the corporates in Brazil nervous as they will need to pay more reals for every $ of debt on their books.

Would these be adverse developments for Brazil? Why?
I think it is important to have stability in the currency before allowing it to float freely. Brasil is still an emerging economy and needs to have a scrupulous approach to its currency & monetary policy. It not only needs foreign capital for development but also needs to have a balanced current account. Further given the financial crisis Brasil went though in 80s due high inflation any sudden change could be detrimental. 2. Were the newly elected Brazilian President Dilma Rousseff and he…...

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