Argentina and Brazil Abolish Dollar in Bilateral Trade

The dollar has begun to fall out of favor in Latin America. Argentina and Brazil are the next two countries that have reduced their exposure to Federal Reserve Notes [FRNs]. According to a report by mercopress.com:

Brazilian and Argentine presidents Lula da Silva and Cristina Fernandez de Kirchner signed on Monday an agreement which officially launches the use of their countries currencies for bilateral trade instead of the US dollar.

Both sides said that bilateral trade would save forex costs, especially for smaller businesses. Bilateral trade between the two countries reached $25 billion in 2007 and is expected to soar another 20% to $30 billion this year. The agreement will be effective from October 1. Brazil sees the move as a first step towards more monetary cooperation in the Mercosur area that other countries could join as well.

"We’re giving a crucial step for a future regional monetary integration” said Lula da Silva during the official reception. "We are going to abolish the dollar as a currency in our trade" he added.

Lula da Silva pointed out that he wanted Brazil and Argentina's trade balance to be more balanced. Argentina had a 2.7 billion US dollars trade deficit with its larger neighbor Brazil in the first half of the year.

"The trade balance should be a two-way street," he said. "There has to be certain balance: one can have a small difference, one year a trade deficit and the next a surplus."

Brazil’s Central Bank said in a release that it had signed with the Argentine Central Bank an accord which establishes the rules for the Local Currencies Payments System, SML between the senior members of Mercosur.

Brazil Raises Basic Rate

On Thursday, the Brazilian Monetary Policy Committee [Copom] of the Central Bank [BC] raised the base interest rate [Selic] by 0.75 of a percentage point, from 13% to 13.75% a year. This is the fourth consecutive hike in the Selic and the highest in almost two years.

The Copom vote apparently was 5-3. Dissenters favored a half percentage point increase. In a statement, the Central Bank said it was raising rates “to promote the conversion of inflation to the target trajectory in a timely fashion.”

Even with falling commodity prices that pushed inflation lower in August to 6.17% from a three-year high of 6.37%, the orthodox central bank seems intent on insuring that demand growth does not outpace supply and keeps to the original inflation target of 4.5% for 2008. Concerns were heightened when earlier data showed the economy expanded at a 6.1% pace in the second quarter.

The Copom, after raising the Selic rate by a larger-than-expected 0.75 of a percentage point in the previous meeting on July 23, used the same language to express its goal of bringing inflation back to its target in a “timely fashion.” A central bank survey of 100 economists anticipates the Selic rate will further increase to 14.75% by year's end.

Comments

[sandspider:]

Interesting article and to the point without a lot of guess work. But to add some guess work; it appears that the dollar is losing some stroke. The Gulf Cooperation Council comprised of Saudi, Kuwait, Bahrain, Omar, Qatar and UAE are looking at fewer dollar exposure as well. They are even considering their own currancy. Considering what the Kuwait Dinar ratio to the dollar is....the Euro could be in for a pounding as well. Stories of "others" bailing from the dollar... "and all the kings horses and all the kings men couldn't put........back together again."

2008 Sep 11 10:10 AM

[MarvinMBA:]

Our declining economy and influence around the world is under adjustment. The holy dollar is being dropped in favor of local currencies...the US dollar apparently is no longer a world standard to hold and trade. We sold the world our paper and now they do not want it for their commerce. Do you blame them with what this administration caused here in the US...the end of our world political, military and economic influence...were going to be second or third rate if we are not already.....too bad this administration sold us down the tubes.

2008 Sep 11 10:46 AM

[Alex Filonov:]

Doom and gloom for dollar... Wait, it's going up second month in a row! How could it happen?

Disclosure: long UUP.

2008 Sep 11 11:44 AM

[ilovehaters:]

It's going up thanks to Saudia Arabia. They are proping it up......along with the Chinese to keep us buying oil and goods from thier respective countries....very simple.

2008 Sep 11 11:49 AM

[buyitcheap:]

Perhaps they got advice from Giselle? Smart move.

2008 Sep 11 03:50 PM

[burrbak:]

Lula da silva understands the need for balanced trade. Would to God that our leadership got it as well.

2008 Sep 11 06:18 PM

[Think-About-It:]

The dollar may rally in the weeks/months ahead but longer term is will fall unless there is a major reversal in our nations debt, trade deficits and economic strength. None of these problems can be solved quickly.

2008 Sep 11 10:21 PM

[bearfund:]

Watch Brazil very carefully. The recession is global and it will not escape. But it seems to have a crowd of Volckers in charge of monetary policy. When their recession ends, watch them boom. Anyone who remembers the 1980s will find Brazil's economy a familiar place in a few years. The US will still be struggling with stagflation, assuming the bailouts don't bankrupt the place entirely.

2008 Sep 11 11:46 PM

[User 228978:]

"Doom and gloom for dollar... Wait, it's going up second month in a row! How could it happen?

Disclosure: long UUP."



Because its being bought by fools like Bear Stearns traders and Lehman commercial real estate investment bankers.

That worked out well

2008 Sep 12 12:05 AM

[richrdinbel...:]

In the linked article I write that an unwinding yen carry trade, that is the EUR/JPY, will propel development of a common currency for South America.

Yes a single unified and common currency is likely now for the Union of South American Nations, UNASUR, as Brazil and Argentina move to abolish the US Dollar in bilateral trade.

2008 Sep 13 03:44 PM