Analysis: Latin America lays out defenses in currency war

Tue Jan 29, 2013 1:23pm EST
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By Krista Hughes

MEXICO CITY (Reuters) - Latin American policymakers are manning their defenses ahead of what could be a new battle in the "currency wars" as flows of hot money put unwelcome upward pressure on their currencies.

Economists and investors predict that an easing in the euro zone's debt crisis, new economic stimulus measures in Japan and a return of risk appetite will fuel bumper investment flows into Latin America and other emerging markets in 2013.

Some policymakers are already at the barricades.

Colombia cut interest rates on Monday and said it would ramp up dollar purchases. Peru plans to pre-pay up to $1.5 billion in foreign debt this year and is intervening aggressively to curb currency gains. And tiny Costa Rica unveiled a steep hike in taxes on foreign investments this month.

Even Mexico, which has a hands-off approach to currency market intervention, is considering an interest rate cut that some economists believe reflects as much a desire for a weaker peso as it does concerns about growth.

"Much of the region is once again dealing with the impacts of currency wars and QE in the developed world," said Standard Chartered senior strategist Bret Rosen, referring to the extraordinary monetary easing measures undertaken by central banks known as quantitative easing.

Low interest rates in developed economies encourage investors to look for yield elsewhere, pushing up the currencies of countries at the receiving end of their attentions. Stronger currencies make exports less competitive, hurting economic growth.

It is a problem that has battered Brazilian manufacturers for several years. The government pushed back by slashing interest rates and intervening in the currency market to weaken the real, introducing capital controls and offering tax breaks for several industries.   Continued...