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A weaker currency makes Brazil's industries more competitive, but too much depreciation could cause inflation, forcing the BRICS nation to raise interest rates again.
SÃO PAULO, Brazil — The Brazilian real weakened sharply on Monday as it briefly crossed over to 2 per US dollar.
According to Reuters, it is the first time since July 2009 that the currency dropped so low. The cause of the real's decline could be the uncertainty of what might happen if Greece pulls out of the euro, which has driven investors away from what they consider to be riskier assets.
Although Brazilian Finance Minister Guido Mantega isn't bothered by the currency's fall. In fact, reported Bloomberg, he's encouraging it to drop even further.
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"The government is loving it," Alfredo Barbutti, an economist at Liquidez DTVM Ltda., told Bloomberg. "The government wanted this. It's not a movement that escaped its control."
According to The Globe and Mail, the declining real marks a victory for Brazil in the "currency war," making it more competitive in the international business market and benefiting local exporters. But too much depreciation could reignite inflation, which would force Brazil to raise interest rates again.
"The debate is whether the currency will increase inflation through the pass-through effect," Flavia Cattan-Naslausky, a markets strategist at Royal Bank of Scotland, said to the Globe.
The real slid 1.1 percent to 1.9879 per US dollar at 4:25 p.m. in São Paulo after touching 2.0022, its weakest level since July 2009, reported Bloomberg.
Brazil's currency has slipped about 6.5 percent against the dollar in 2012, according to Reuters. The decline came after a series of central bank dollar purchases at auction and a fall in Brazil's benchmark interest rate to near-record lows.
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