Update: Fed's Taper Puts Brazil's Currency Volatility Back in the Spotlight

Brazil’s volatile currency is back in the spotlight, thanks to the Fed's announcement that it will soon begin to taper its program of asset purchases known as Q3. The following chart shows that the exchange rate for Brazil's currency, the real, is approaching the low reached after the August taper scare and is almost back to the five-year low reached in March 2009.

An article in the Financial Times puts Brazil at the head of what it calls the "fragile five," along with India, Indonesia, South Africa, and Turkey. To say that the Brazilian government is nervous about the situation would be a grave understatement, with a national election and the World Cup coming up next year.

If the weak real is causing despair in Brazil today, the country must have been dancing in the streets with joy two years ago when the currency was headed for record highs. But no--the it was in despair then, too. At that time, its finance minister, Guido Mantega, characterized the Fed's policy of quantitative easing as a “currency war” at his country’s expense.

What explains the paradox that both appreciation and depreciation of a country's currency are both perceived as harmful to the economy? I wrote about this back in August when tapering was only a threat on the horizon. Now that it is actually about to start, the issue takeson a new relevance. Here is a somewhat abbreviated version of the earlier post. >>>Read more