MercoPress. South Atlantic News Agency

Brazil and Chile Battle Rising Currencies

Brazil on Tuesday threatened tougher capital controls and other measures to keep its currency from rising against the dollar, a day after Chile's central bank unveiled its own $12 billion plan to buy greenbacks.

The moves underscore concerns about a weaker U.S. currency across many emerging markets.

“We're not going to allow our American friends to melt the dollar,” Brazilian Finance Minister Guido Mantega told reporters at a news conference in Brasilia. Mr. Mantega previously described the U.S.'s plan to pump $600 billion into its economy as a bid to weaken the dollar in order to unfairly aid U.S. exports.

While the specific economic stories of countries like Brazil and Chile vary, they share a common theme: A declining U.S. dollar combined with investor optimism for commodity-rich emerging markets is attracting a flood of foreign portfolio investment to these nations—sending their currencies soaring.

The strong currencies make exports less competitive and domestic manufacturers more vulnerable to competition from foreign-made goods.

For example, Brazilian manufacturers are increasingly up in arms about the growing penetration of imports from China, which has been accused of keeping its currency artificially weak by linking it to the dollar. On Monday, Brazilian officials said they would lobby China to let its currency strengthen during an official visit in April. In recent weeks, Brazil hiked import taxes to keep out Chinese toys.

Currencies are rising in many emerging markets. But moves in Latin America have stood out. Brazil's currency is up more than 35% against the dollar since early 2009, and some economists consider it the world's most overvalued currency. Chile's peso isn't far behind, rising more than 10% since in just over six months.

Late Monday, Chile's central bank said it would begin buying some $12 billion dollars to stanch the rise of the peso against the dollar. Chile's peso is climbing as copper soars to record highs. The Andean nation boasts some of the world's biggest copper mines, which account for about half of Chile's exports.

In Brazil, the real is rocketing in part because global investors pouring money into the fast-growing South American nation to cash in on its high interest rates. Brazil's central bank has set interest rates at 10.75%—among the highest in the world—to tamp down inflation amid soaring government spending.

During his news conference, Mr. Mantega promised to trim state spending enough to allow the central bank to start easing rates. But many economists are skeptical that the brand-new government of President Dilma Rousseff—faced with massive welfare and infrastructure demands—can make good on the promise.

Meanwhile, Mr. Mantega said Brazil has an array of weapons to contain the dollar's slide.

In October, for example, Brazil tripled a tax on foreign investment in some bonds. In the past, Brazil has also raised import tariffs to protect industries from less expensive foreign-made goods.

Capital controls and currency interventions were once taboo because they can have unwanted side effects. But officials at the International Monetary Fund and other institutions now back the measures as a temporary way to avoid volatile ebbs and flows of capital.

By John Lyons - The Wall Street Journal