International markets have recovered strongly in the wake of a decision by the Brazilian government to let the real float on world markets.
The US market made strong gains last night, with the Dow Jonex index closing strongly and ending up 219.62 points at 9340.55, a gain of over 2.4 per cent.
The broader based Nasdaq index gained over 3 per cent and the US dollar also took cheer, with its rate against the euro moving to $1.1575 from $1.694 the previous day.
Earlier European markets had also gained strongly, as investors took the view that acceptance of a floating currency was a far better option that a costly battle to defend the target rate.
Investors were pleased that the government had not used up more reserves trying to defend the new crawling peg, which was announced on Wednesday. Opinion was divided, however, over the likely impact on economic activity. Some economists said interest rates could fall because the threat of devaluation had been removed, but others warned that rates would need to be kept high to stabilise the currency and that the recession would deepen. European markets finished strongly, with the FTSE 100 index in London closing 120.8 higher at 5,941, while the Paris and Frankfurt markets were both around 1.4-1.5 per cent higher. Despite the international gains, in Dublin the ISEQ index ended slightly lower as investors' funds flowed to the more liquid markets. Dublin is likely to follow the trend upwards on Monday.
Brazilian financial markets rebounded strongly in the afternoon, as investors in Sao Paulo, the country's financial centre, greeted the news with a mixture of relief and euphoria. Having traded up over 20 per cent for most of the day, the Bovespa index on the Brazilian market ended up 33 per cent late last night.
The Brazilian government said it would announce a new foreign exchange policy on Monday. Mr Fernando Henrique Cardoso, the Brazilian president, broke off his holiday for the second time in a week to return to Brasilia where his government is seeking commitments of support internationally.
Economists said the government was most likely to introduce a floating exchange rate regime on Monday, although they did not rule out the sort of currency board system that neighbouring Argentina uses.
Brazil's decision to allow the value of its currency to float freely on foreign exchange markets was "a wise move", an IMF official said yesterday. "The decision to stop intervening on the exchange market appears to be a wise move to stop the loss of reserves," the IMF spokesman said. Traders said about $1.7 billion were pulled out of Brazil on Thursday by jittery investors, bringing the total to some five billion dollars since the beginning of January.
The IMF in November arranged a $41.5 billion international loan package aimed at restoring investor confidence in the largest Latin American economy. The initiative was conditional on Brazilian implementation of economic reform and austerity measures.
Last night President Cardoso moved to bolster confidence, saying that Brazil would meet all its international obligations, including to its bankers. He said that it would continue to defend the real and that the float had restored international confidence in the economy.
