Dollar Drop Too Powerful for Brazil as Reserves Rise

By Oliver Biggadike and Matthew Brown

Nov. 13 (Bloomberg) -- Brazil, South Korea, Russia and other developing nations are fighting a losing battle to mute gains in their currencies as a falling dollar and economic recovery create more demand for their assets than central banks can handle.

South Korea Deputy Finance Minister Shin Je Yoon said yesterday the country will leave the level of its currency to market forces after adding about $63 billion to its foreign exchange reserves this year to slow the appreciation of the won. Chile Finance Minister Andres Velasco said the same day that lawmakers approved an increase in local debt sales to finance spending, a move that will allow the government to keep more of its dollar-based savings overseas and slow the peso’s rally.

Governments are amassing record foreign-exchange reserves as they direct central banks to buy dollars in an attempt to stem the greenback’s slide and keep their currencies from appreciating too fast and making their exports too expensive. Half of the 10-best performers in the currency market this year came from developing markets, gaining at least 14 percent on average, according to data compiled by Bloomberg.

“It looked for a while like the Bank of Korea was trying to defend 1,200, but it looks like they’ve given up and are just trying to slow the advance,” said Collin Crownover, head of currency management in London at State Street Global Advisors, which has $1.7 trillion under management.

The won, after falling 44 percent against the dollar in March 2009 from its 10-year high of 899.69 to the dollar in October 2007, is now headed for its biggest annual rally since a 15 percent gain in 2004. It traded today at 1,160.32, up 8.6 percent since the end of December.

‘Suffered Tremendously’

Brazil’s real is up 1.6 percent this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year.

“We have to be careful that our exchange rate doesn’t appreciate too much as to deindustrialize the country,” Marcos Verissimo, chief of staff at Brazil’s state development bank known as BNDES, said yesterday at a conference in Sao Paulo. “The capital goods industry has suffered tremendously.”

Russia’s Bank Rossii increased its foreign reserves by 15 percent since March 13 as it sold rubles in an attempt to cap the currency’s gain. Even so, the surge in commodities prices this year means Russia’s steps to fight a stronger ruble may “not be productive,” the International Monetary Fund said yesterday. Energy, including oil and natural gas, accounted for 69.5 percent of exports to countries outside the former Soviet Union and the Baltic states in the first nine months, according the Federal Customs Service.

Dollar Index

“There are changes in the underlying factors that call for a more appreciated exchange rate,” Odd Per Brekk, the Washington-based IMF’s senior representative in Russia, told reporters.

Intercontinental Exchange Inc.’s U.S. Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, touched 74.774 on Nov. 11, the lowest level since August 2008, and has fallen 16 percent from the high this year of 89.624 on March 4 to 75.550 today.

Much of the greenback’s decline stems from investors borrowing funds in the U.S., where the target benchmark interest rate is between zero and 0.25 percent. They then invest the proceeds in countries with higher rates and faster growing economies.

World Bank, France

World Bank President Robert Zoellick said the recent fall of the dollar is a response to the currency’s earlier rise and to market dynamics, giving the U.S. few near-term options for changing its course.

The value of the dollar depends on confidence in dollar- denominated assets and also to the movements of other currencies, Zoellick told Asia-Pacific business leaders in Singapore today. The dollar grew in value during the height of the financial crisis because investors viewed it as a safe haven, he said.

France’s Finance Minister Christine Lagarde said in an interview in Singapore today that her government favors a “strong” dollar as an appreciating euro threatens to hurt European exports.

International Investment

An unprecedented net $47 billion flowed into equities in India, Indonesia, the Philippines, South Korea, Taiwan and Thailand in the last three quarters, according to data compiled by Bloomberg. That eclipsed the previous full-year high of $33 billion in 2005, nine year of data show.

“The dollar is weakening because the U.S. has the lowest short-term interest rates in the world will be the sell side of the carry trade as long as that remains true,” Chris Low, chief economist at FTN Financial in New York, wrote in a note to clients yesterday.

Chile’s peso has strengthened 26 percent this year versus the dollar, the second-biggest gain among Latin American currencies after the 33 percent rise in the Brazilian real.

South Korea’s economy expanded 6 percent in the nine months ended in September, the fastest rate since it grew 6.9 percent during the same period in 2002. The rebound came as companies such as Hyundai Motor Co. in Seoul and Samsung Electronics Co. in Suwon reported surging profits driven by exports.

‘Hard to Fight’

Brazil’s economy emerged from a recession in the second quarter, swinging to a 1.9 percent expansion after six months of contraction, a Sept. 11 report from the statistics agency showed. Six straight months of job growth, coupled with tax breaks and record low borrowing costs, pushed up consumer spending and helped Latin America’s largest economy rebound from the global financial crisis.

“I hear a lot of noise reflecting the government’s discomfort with the exchange rate, but it is hard to fight this,” said Rodrigo Azevedo, the monetary policy director of Brazil’s central bank from 2004 to 2007. “There is very little Brazil can do,” said Azevedo, who runs $1.8 billion at JGP SA in Rio de Janeiro, in an Oct. 16 interview.

To contact the reporter on this story: Oliver Biggadike in New York at obiggadike@bloomberg.netMatthew Brown in London at brown42@bloomberg.net