Tuesday, September 13, 2011

Brazil's economy adapts to a 12% interest rate

The success of the Brazilian economy has lead to opportunities for investors which increases demand for loans, leading to high interest rates.  In turn, the high interest rates in Brazil are attracting foreign investors, who sell dollars to buy real.  This can be modeled as an increase in demand for real (or an increase in supply of dollars) which results in real appreciation or dollar depreciation.

This hurts Brazilian firms:

The strong real is an even bigger problem for manufacturers. Humberto Barbato owns a company that makes parts for high-power transmission lines. Decades ago, he benefited from government policies that helped manufacturers set up export businesses. Now the currency is pricing him out of hard-won overseas markets. At home, he's losing clients to cheap Chinese imports.

And helps Brazilian consumers:

He does get some comfort. While visiting his son in Florida recently, he went on a strong-real shopping binge with the other Brazilians at the local mall. "That's my revenge," Mr. Barbato said.

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