Latin American Inflation Fears

In Financials, Politics on November 25, 2009 at 14:08

My persistent interest in the dollar highlights its paramount importance in the course of the global economy. As the world’s major reserve currency, the dollar value effects extend across the world. Emerging markets seem to be also potential victims of the weak ‘greenback’ as dollar-driven asset bubbles spread towards the continent.

In an effort for Latin American states to stabilise their currencies against the dollar, central bankers have been buying foreign reserves which in turn has increased the money base fuelling domestic inflationary expectations. The Brazilian government has imposed a 2 percent tax on capital inflows destined to its equity and debt markets, to ease the frenetic surge of its currency. Brazil’s ‘real’ has risen more than 30 percent against the dollar this year.

Latin America is expected to grow at almost 3 percent next, much quicker than the developed world. If Latin America is to avoid another currency-crisis, officials should be very cautious on the accumulation of reserves as this may lead to uncontrollably rising inflation and future depreciating pressures on their currencies. Manipulating their interest rates may engender homegrown deficiencies and risk future currency stabilisation. The weak dollar is shucking Latin America’s blood deep and slowly.

by the Self-Seeker



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