Capital controls eyed as global currency wars escalate

Stimulus leaking out of the West’s stagnant economies is flooding into emerging markets, playing havoc with their currencies and economies.

Ambrose Evans-Pritchard
Telegraph

Brazil, Mexico, Peru, Colombia, Korea, Taiwan, South Africa, Russia and even Poland are either intervening directly in the exchange markets to prevent their currencies rising too far, or examining what options they have to stem disruptive inflows.

Peter Attard Montalto from Nomura said quantitative easing by the US Federal Reserve and other central banks is incubating serious conflict. “It is forcing money into emerging market bond funds, and to a lesser extent equity funds. There has truly been a wall of money entering many countries,” he said.

“I worry that we are on the cusp of a competitive race to the bottom as country after country feels they need to keep up.”

Brazil’s finance minister Guido Mantega has complained repeatedly over the past month that his country is facing a “currency war” as funds flood the local bond market to take advantage of yields of 11pc, vastly higher than anything on offer in the West.

“We’re in the midst of an international currency war. This threatens us because it takes away our competitiveness. Advanced countries are seeking to devalue their currencies,” he said, pointing the finger at America, Europe and Japan. He is mulling moves to tax short-term debt investments.

Goldman Sachs said net inflows have been running at annual rate of $520bn (£329bn) in Asia over the last 15 months, and $74bn in Latin America. Intervention to stop it creates all kinds of problems so the next step may be “direct capital controls”, the bank warned.

Brazil’s real has been one of the world’s strongest currencies over the past two years, aggravating a current account deficit nearing 2.5pc of GDP. The overvalued exchange rate endangers Brazil’s industry, especially companies that compete with Chinese imports. The real has appreciated to 1.7 to the dollar from 2.6 in late 2008, and by almost the same amount against China’s yuan.

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