After months of tough talk to speculators and other governments driving up the Brazilian real, FinanceWhen Brazil used the phrase "global currency war" earlier this year, the blogsphere went ablaze, arguing that QEII was in fact a plot that would be the sole driver for higher commodity prices and lead to the ruin of developing countries.
As Mr. Mantega announced the controls, investors were surprised to hear him acknowledge that there are legitimate reasons for the real to rise.
Some of the gains are "inevitable, because the real is a stronger currency, and the economy of Brazil is stronger than other economies, so there is an attraction and a security," Mr. Mantega told reporters in Brasilia on Wednesday as he announced an extension of a 6% tax on locals who borrow abroad—an effort to keep dollars out of Brazil.
That is a big change from his confrontational statements of last September, when he warned currency traders that the government would draw on "unlimited resources" to buy dollars and keep the real from rising. "We will not lose this game," he said at the time. The real has gained 8.5% against the dollar since that Sept. 15 speech.
Mr. Mantega declared that Brazil was in the cross hairs of a "currency war," where rich countries like the U.S. keep their currencies weak, artificially pumping up currencies in the developing world.
The Brazilian real is rising as foreign money pours into the South American nation from investors optimistic about the country's growth prospects, as well as those hoping to cash in on its 11.75% overnight interest rates, among the world's highest.
Those high interest rates have made Brazil a key global destination for the so-called carry trade, where investors borrow money in countries like the U.S., where rates are low, and deposit it in Brazil where rates are high, pocketing the difference.
In fact, Brazil's currency was appreciating because it is growing, has high interest rates and numerous natural resources. In short, it is an attractive place to invest, inviting people to, well, invest there. Hence, the real reason for the Reals increase relative to other currencies. Now, a major Brazilian official is admitting as such.
I'm sure there will be many retractions today ....