Argentina, Brazil Abolish Dollar in Bilateral Trade

Thursday, September 11, 2008

The dollar begins to fall out of favour in Latin America.
Argentina and Brazil are the next 2 countries that reduce their exposure to Federal Reserve Notes (FRN). 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 percentage point, from 13% to 13.75% a year. This is the fourth consecutive hike in Selic and the highest is almost two years.
The Copom vote apparently was 5-3. Dissenters favored a 0.50 percentage points increase. In a statement the Central Bank said it was raising rates “to promote the conversion of the 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 in insuring 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 6.1% in the second quarter.
The Copom after raising the Selic rate by a larger-than-expected 0.75 percentage point in the previous meeting July 23 used the same language to express their 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 the end of the year.

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