South America sees new currency wars despite intervention cost

Currency market intervention has cost South America's central banks more than $13 billion in the last 2-1/2 years but they are likely to maintain their defenses against hot money inflows if a fresh rush of cheap money sparks another round of currency wars.

Latin American finance ministers meeting in Chile on Friday said monetary easing in developed countries could hurt their export competitiveness by pushing up currencies in the region - a problem they have been wrestling with since the global financial crisis.

Bank of England Governor Mervyn King warned last week that a 2013 might see a growing number of countries deliberately weakening their currencies to offset the impact of a slow global economy.

Central bank data shows Brazil, Chile, Colombia and Peru have bought $135 billion in dollars to help keep a lid on their currencies since mid-2010, just before the U.S. Federal Reserve announced its last round of monetary easing, dubbed QE2.

The Fed is now well into QE3, and Chilean Finance Minister Felipe Larrain said Wednesday's decision to further bolster U.S. asset purchases was a "source of worry" for all emerging markets with healthy growth and floating exchange rates.

Low interest rates in advanced economies encourage investors to seek higher returns in faster-growing emerging markets such as Latin America, but accelerating capital inflows put unwelcome upward pressure on currencies, making exports more expensive.

"This is the third round of QE and we are starting at a level where the FX rates are a lot stronger," said Jefferies Latin America strategist Siobhan Morden, who sees central bank intervention as the biggest concern for investors in local debt.

"It clearly places more stress on policymakers in how to manage this liquidity."

Low inflation in Peru, Chile and Colombia and healthy budget balances give central banks plenty of leeway to keep buying dollars, adding to already-swollen reserves, analysts said - a contrast to the last round of QE, when many countries were struggling with inflation fanned by a V-shaped recovery.

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