Tuesday, October 27, 2009

Real Costs

The Brazilian Real has been appreciating significantly since last March. This rally has pushed the price of Big Mac up dramatically, according to this story in Bloomberg:
Buying McDonald’s Corp.’s flagship hamburger costs 8 reais in Sao Paulo, or $4.62, compared with $3.99 in New York and 2.29 pounds in the U.K. capital, or $3.74.
This is the counterpart to the dollar's weakening of course. But Brazil's President has not taken this lying down. As the Economist reports:
Brazil has gone for the direct approach. Foreign capital has flooded in, attracted by the healthy prospects for economic growth and high short-term interest rates. That has pushed up local stock prices, as well as the real, Brazil’s currency. To stem the tide, the government this week reintroduced a tax on foreign purchases of equities and bonds. Though many doubt the long-term efficacy of such measures, it had an immediate effect. The real, which had risen by more than one-third since March, fell by 2% (before regaining some ground). Brazil’s main stockmarket dropped by almost 3%.
This seems like quite a costly way to prevent currency appreciation -- cause your own stock market to fall. Perhaps a useful move to prick a bubble, but Brazil's appreciation versus the dollar does not seem to be driven by much other than fundamentals.

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