Thursday, November 19, 2009

Currency Wars, Part 2

The very delicate global economy just got a little more delicate.

Asian currencies came under pressure on Thursday after a move from Brazil to further curb foreign inflows sparked fears that other countries would follow suit.

Brazil moved overnight to close a loophole that had allowed investors to avoid a 2 per cent tax on foreign investment in equities and bonds announced last month.

The government announced a 1.5 per cent tax on American Depositary Receipts. Guido Mantega, Brazil’s finance minister, said some foreign investors had been buying ADRs to get exposure to the local equity market while avoiding the tax.

Both, Brazil and Taiwan have now imposed capital controls. Nothing will kill global economic growth faster than trade wars, currency wars and controls on capital flows.

The U.S. is, of course, not innocent in this mad game. President Obama imposed a surtax on tires produced in China, as a favor to his union buddies.

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