“I have in my hand a piece of paper,” said the finance minister over fears of a currency war. “Peace in our time,” he added. And yet, actually, it may be that all this talk of a currency war is little more than fearmongering.

Brazil seems to be the country that is doing the most sabre rattling. Last year, her finance minister warned of an impending currency war, and this year she has taken steps to curb speculation in the currency markets, and in the process has opened herself up to the criticism she is trying to manipulate her currency.

Brazil is being hit by a carry trade – that’s when investors borrow from countries such as the US where interest rates are so low, and lend in countries such as Brazil where rates are much higher. But it is not just Brazil that is suffering. Korea, Indonesia, and to an extent India, are also being hit by similar flows of hot money.

And in these very same countries inflation is becoming a fear. To curb rising prices, rates should go up, but if this happened the interest rate differential with the US would grow and the carry trade may become even worse.

So the money floods in, and currencies soar against the dollar.

No wonder they are up in arms. No wonder Uncle Sam is being accused of being a currency manipulator by the back door. The US, they say, is being hypocritical. It accuses China of manipulating its currency, and then via quantitative easing does the same thing. Shakespeare put it well: “By any other name currency manipulation would smell so rotten,” or so Romeo said to Juliet.

But look a bit closer and the story is not quite so simple.

At the time of writing, one Brazilian real equals 0.592 US dollars, whereas back in January 2009, there were 0.42 reals to the dollar. So, sure, the dollar is a lot cheaper in terms of Brazilian currency today than it was two years ago. But then, if you wind the clock back to July 2008, just before the collapse of Lehman Brothers, then there were 0.64 reals to the dollar. In other words, before the economic crisis got going, the dollar was even cheaper than it is today.

However, before you quickly conclude that Brazil has no case, and its accusations against the US are not well founded, you may want to wind the clock back even further.

The fact is that for most of the noughties, the dollar relative to the real was more expensive than it is now. 2008, up to the moment that Lehman Brothers went, may have been something of a blip. In fact, for a five-year period between the midpoint of 2001 and the beginning of 2006, the dollar was more expensive than it was even in January 2009 when it hit its recent high.

So, sure, US politicians could point to the relationship between the real and the dollar, and tell Brazil to stop bleating, that in 2008 the dollar was cheaper than it is today. But Brazil can retort, stop being economical with the truth; 2008 was a fluke, and for most of the last decade the dollar was much more expensive than it is right now.

---

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?