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By Tim Seymour

Brazil just conducted a swap operation to try and support its currency, as the Brazilian real moved to 2.16 intraday lows before the operation. If it is in trying to support the currency now after spending the last 18 months trying to weaken it, this is a bit of cruel irony for Finance Minister Mantega, President Rousseff, and the Brazilian Central Bank.

Inflation that was not out of control is gaining momentum after a 9% move in the currency in two months. Now, while Standard & Poor's and other credit agencies are lowering their outlooks for Brazil, the government's game plan is uncertain as the market ties their hands. Rates must go higher, and this will crimp the economy.

A quick look around core emerging markets shows runaway currencies robbing central banks of their creativity at a time when inflation is supposedly low, but they can't risk spiraling imbalances. In India, the INR has moved to all-time lows against the U.S. dollar, and at a time when lower inflation should be giving Indian policy makers plenty of room to reform policy to be more market friendly.

What's going on? Emerging market currencies are caught between policy that has been overly accommodative, growth that has ground to a halt, and capital flows that say, "No thanks, I don't need to be here," especially if rates are going higher.

Source: Whose Currency Can Weaken Fastest? And At What Cost?