The competitive benefits of low (i.e. undervalued) exchange rates are well known (evidence), but by definition, we can’t all have them. Still, some countries such as China are fairly active managers of their exchange rates (evidence/reaction). If/when countries start managing their exchange rates down, there is a strong temptation for others to follow suit, all the more so when the initiator is a big economy.
So its big news that Brazil has just imposed a 2% tax on portfolio capital inflows in what looks like an effort to stem the appreciation of its currency.
Where this will lead is anyone’s guess, but here is The Economist suggesting that “the current system is unsustainable“.
An interesting move, right? A victim of its own success, the FT reckons.
Venezuela has been playing a similar game recently, although instead of worrying about the strength of its currency, it’s worried about its weakness. It sells bonds in dollars to locals who pay in bolivars at the official exchange rate. Then they can on-sell them in dollars and convert back to bolivars at the market rate.
Wow! That is a very unusual mechanism. I can see how it increases demand for bolivars, but its odd to see governments using black markets that must only exist as a consequence of their own policies. Who else but Chavez would come up with such a thing?
But also, why do they want to pump up the rate like this?