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The direct penalties of a fixed exchange rate pegged at an overvaluation
level are: high interest rate and deflation of asset denominated in local
currency, not to mention the need to tie up foreign reserves to support
the overvalued currency, instead of using it for stimulative fiscal packages.
<br>When the peg is released after a long period, both interest rate and
asset price will bound back from peg-induced lows and settled according
to economic fundamentals.
<br>For Brazil this is the best option, if it does not set off a round
of competitive devaluation from around the region and the globe.
Free float, nevertheless, will reduce the impact of competitive devaluations,
becasu each currency will have to seek its proper value in trade terms
according to fundamentals.
<br>For 18 months now, I have been calling for HK to ditch its peg.
<p>Henry
<p>Doug Henwood wrote:
<blockquote TYPE=CITE>So the Brazilian stock market was up 33% today, closing
the week where it
<br>began. <<a href="http://quote.yahoo.com/q?s=^BVSP&d=2b">http://quote.yahoo.com/q?s=^BVSP&d=2b</a>>.
The wire stories said the
<br>markets were giving the devaluation a seal of approval. It was universally
<br>believed that a Brazilian devaluation would bring the end of the world,
but
<br>now the markets are celebrating it as a good thing. Capitalism is very
odd.
<p>Doug</blockquote>
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