US Treasury Secretary Timothy Geithner pledged on Monday to work with Brazil to help address global economic imbalances including China's undervalued currency, raising the possibility of a growing alliance between the Western Hemisphere's two biggest economies.
While on a one-day visit to Brazil, Geithner expressed sympathy for a recent wave of capital inflows that has caused severe distortions such as a badly overvalued currency in Brazil's otherwise booming economy. Geithner avoided mentioning China by name, but attributed some of Brazil's problems to countries "that understand the value of having an undervalued currency" - a clear reference to China's yuan.
He added that the United States was seeking to shape a consensus among countries on how to deal with global economic imbalances. He also said that Brazil may need to take further measures on its own, such as fiscal reforms, to deal with such distortions. The message was likely to be well-received by the government of Brazilian President Dilma Rousseff, who Geithner was set to meet later on Monday. Since taking office on January 1, Rousseff has sought closer ties with Washington in part out of the hope that the combined clout of the two countries will be enough to convince China to let the yuan appreciate faster.
"We have a common interest with Brazil and other emerging economies that growth is balanced," Geithner said at a seminar at a Sao Paulo think-tank. Geithner's visit is designed to lay the groundwork for the February 18-19 meeting of the G20 group of nations in France, as well as a trip by US President Barack Obama to Brazil in March.
The undervalued Chinese yuan has posed a major problem for Brazil's economy by fast eroding its trade balance and transferring jobs abroad. Brazil's Finance Minister Guido Mantega has deemed the trend a "currency war" waged by countries seeking to export their way to greater prosperity. Quantitative easing by the US Federal Reserve has also contributed to Brazil's strong capital inflows, as investors in the developed world chase high yields in fast-growing emerging markets. Some of the distortions are also of Brazil's making due to high government spending and interest rates.
Yet the focus on China signals that Brazil is likely, at least for now, to try to work with the United States on common causes and improve relations that were chilly for most of the past year under Rousseff's predecessor. Geithner said that countries such as Brazil that face an "outsized burden" due to their strong currencies "may need to adopt carefully designed macro-prudential measures" - a reference to capital controls that Brazil has recently implemented to ease strong inflows.
Rousseff also wants to work with Washington against France's proposal to tighten international commodity market regulations, a move it argues benefits only wealthy food importers and could stifle output by major food producers. Lael Brainard, a US Treasury under-secretary who is accompanying Geithner on the trip, said Brazil and the United States share common ground on the G20 commodities agenda and want to keep the focus on improving market functioning.
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