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Brazil's real may fall further
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January 22, 1999: 12:19 p.m. ET
Global markets shy from currency intervention; economic fears mount
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NEW YORK (CNNfn) - Global markets tumbled Friday morning after the Brazilian government lost its fight to revive the lifeless real, and speculation over the ripple effects of the currency crisis hit a fever pitch.
Some analysts say there's no telling when the storm will die down.
"We saw another $410 million leave yesterday, and with flows like that it's obvious things are far from calming down," said Alexandre Mendes, a trader at Banco Patente in Sao Paulo. "It's anybody's guess what will happen now."
The Brazilian Central Bank Friday began selling U.S. currency to the dollar-depleted foreign exchange market through the government-owned Banco do Brazil, an attempt to bolster the lagging currency, which has lost 30 percent of its value in 10 days.
It was the first time the monetary authority had stepped in to support the currency since it let the real float a week ago after failing to engineer a controlled devaluation.
The Central Bank's intervention came one day after the real had tumbled 7.6 percent to close at an all-time low of 1.72 to the dollar, due to a depletion of dollars in the market and amid a tidal wave of dollar outflows.
The bank declined to comment on the intervention.
The action brought the newly floated real currency back from an opening quote of 1.74 per dollar to 1.65, but by mid-morning it had slipped back to around 1.70.
"The dollar is only falling because the Central Bank is selling through the Banco do Brasil," said one foreign exchange dealer.
Brazilian shares tumbled 3.3 percent in early trade on concerns that persistent capital flight will force an even deeper currency devaluation, traders said.
Asian markets finished down, and U.S. stocks, also hit with disappointing earnings from IBM, fell sharply. Likewise, U.S. Treasurys edged up as investors headed for higher ground.
The Brazilian real was trading at 1.72 to the U.S. dollar late Friday.
But Marc Chandler, a senior currency strategist for Independent Global Market Advisor said "it's possible" the currency will tumble further to around 2 to the dollar.
"I think Brazil is really caught through a combination of its own policy mistakes and powerful market forces," he said. "Even though Brazil has been taking some important steps on the fiscal front, the market is afraid that the interest rates that Brazil has to raise in order to slow down the real's depreciation is going to offset that fiscal improvement."
He added Brazil currently spends about one-third of its budget on servicing its debt. If interest rates go up, Chandler said, the debt servicing burden becomes greater.
Some say Latin American countries would be wise to "dollarize" their economies, or convert to the U.S. dollar, a plan Argentina already is considering. But Chandler said he believes such a conversion isn't likely to happen in a country as large as Brazil, the world's eighth- largest economy.
"There is some talk in the market that such a plan to basically dollarize these economies is one way to avoid the kind of crisis we've seen for the past 18 months," he said. "I think it could work. The problem with these kinds of ideas is that the political obstacles are much greater than the economic obstacles. To dollarize an economy seems to be [perceived as] sacrificing monetary sovereignty."
He added such a plan might make sense for Argentina, but it "would be a totally different thing for a country like Brazil to do it."
"I don't think that's a near term solution for anybody's problems," he said.
Ripple effect
Speculation abounds over whether the effects of Latin America's currency plight, will rock the foundation of Russia's recovering economy. Some, too, fear, it could worsen the situation in Asia, where the emerging market economic crisis began more than a year ago, and prompt China to devalue its currency.
Chandler, however, writes that off as conjecture.
"A lot of people in the market are betting that China will devalue its currency, but I think once again my friends are whistling in the wind," he said. "I think there is no way that China will devalue its currency this year, marking the 50th anniversary of the Chinese revolution."
Moreover, he said, China doesn't need to.
"They are taking domestic measures which makes devaluation less necessary," Chandler said. "They are subsidizing exporters, cutting back on imports, and they are stimulating their own economy."
To be sure, he added, Hong Kong is vulnerable. But so far "their asset markets are bearing the burden of the adjustments so their currencies won't have to." 
-- from staff and wire reports
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