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Currency war comes to S. America's key emerging markets

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Guido Mantega, <a href="http://en.wikipedia.org/wiki/File:Guido_mantega.jpg" target="_blank">courtesy of Agência Brasil.</a>

RIO DE JANEIRO, Jan. 5 (UPI) -- Currency wars have come to Latin American shores as emerging markets Brazil and Chile, destinations of choice for impatient high-yield investors, found themselves battling to keep exports competitive.

Brazil and Chile are drawing millions of dollars in international investment because of their potential lucrative interest rate earnings. At the same time, capital inflows are revaluing their currencies upward -- to the dismay of their exports.

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In a week marked by Venezuela's second devaluation in a year and dismal growth forecasts in that country, Brazil and Chile poured unspecified chunks of dollars and slapped new controls to prevent currencies gaining further against the dollar.

What would have been music to the ears of economists and market analysts last year now endangers the export markets the two countries built over the past months as their merchandise becomes more expensive.

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Officials took swipes at the U.S. administration for not doing enough to strengthen the dollar -- or of doing the opposite to keep diluting the dollar's true worth in order to keep U.S. exports attractive.

Disagreements over what exactly may be happening abound.

Brazilian Finance Minister Guido Mantega repeated comments the United States was pursuing its bid to "melt" the dollar and vowed the Latin American country would take measures to counteract.

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Latin American sentiment against the U.S. administration and the dollar follows reports that U.S. monetary plans may include a massive injection of cash into the economy to keep exports buoyant.

Latin American anger also is finding targets in China, which is facing accusations its cheap exports are flooding Latin American markets and undermining local manufacturing. Already, several regional governments have upped taxes to discourage local appetite for Chinese goods.

Added to the problem of investor interest cash inflows pushing values of the real and the peso, recent rises in the prices of commodities exported from Latin America have also pushed upward Latin American currencies -- with the remarkable exception of the Venezuelan bolivar.

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Chile is one of the world's largest exporters of copper, which appreciated in value in recent months, nudging the peso upward in the process. Now the Chilean central bank is having to pour billions of dollars in an effort to cool down the currency.

Chilean financial industry sources said the central bank could end up buying more than $10 billion of greenbacks as part of the moderating effort.

Analysts said more currency interventions could follow across the board in Latin America.

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In October U.S. Treasury Secretary Timothy Geithner called on the Group of 20 nations to stop manipulating their currencies to prevent excessive volatility and a global currency war. The comment was seen aimed at not only China but also Latin American countries that have built huge trade surpluses, particularly Brazil.

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However, analysts said, Brazilian attempts at soaking up liquidity and encouraging people to save more had also led to foreigners coming in to profit from the country's lucrative interest rates, some of the highest in the world, and investment opportunities.

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