Talk about Economic Volatility...

When I arrived in Brazil in September 2006, the dollar-real exchange rate was $1-2.25. Over my 18 months there, as the Brazilian economy improved drastically and the American economy faked its way along, it gradually dropped by 60 cents, so that when I left in March of this year, it was $1-1.65. (While I was happy for Brazil's economy to be so strong, it was not so much fun losing what amounted to 25% of my income while I was there, as I was being paid in dollars). The real continued dropping, ultimately dipping as low as $1-1.55 this August.

The fact that it took 18 months to fall 60 cents makes it all the more remarkable that, in about the last 45 days, the real has gone from 1.65 to the dollar back up to 2.25 to the dollar (it's now running 2.16 to the dollar, but yesterday it hit 2.25 while the international stock markets were open). Put another way, what took 18 months to fall took only about 45 days to rise back up to where it was in September 2006. From last Friday (the 3rd) alone to Monday, the real closed up an unbelievable sixteen Brazilian cents. That may not sound like a lot, but when you consider the fact that usually a shift up or down of 2 or 3 Brazilian cents was a major shift, the sixteen cents in one market day is mind-boggling.

In spite of this sudden (and perhaps temporary) turn of events, these shifts certainly do not signify that the Brazilian economy is suddenly in dire straits; indeed, they are overall performing far more strongly than the U.S. markets right now, in large part because the Brazilian banking system has not caught itself up in the greedy credit market in the way that the U.S. has for a number of reasons relating to overall individual wealth and income in Brazil, the basic differences in home ownership between the two countries, and the availability of credit in the two countries.

Nor does it seem likely at this moment that Brazil's economy is in any grave danger of fallout from the U.S. in terms beyond the dollar-real rate. Firstly, Brazil has done an excellent job of breaking its 1990s neoliberal dependency on the dollar. The Brazilian economy has diversified and strengthened on its own under Lula's administration. Secondly, and related to this, Lula has worked hard in the past 6 years to establish and strengthen Brazil's business ties beyond the United States and Europe. As a result, Brazil is a major trading partner with China, as well as the leading trade figure in Latin America. Under Lula, Brazil has also really begun important trade deals with the Middle East and Africa. Thus, Brazil's businesses and economy, while still affected by the events in the American and European markets, are in no way as heavily dependent on the well-being of the U.S. market for the health of Brazil's own economy.

This isn't to say the exchange rate shifts have no impact on Brazil. American imports to Brazil suddenly cost a considerable amount more in local values than they did 2 months ago. Likewise, Brazilians who are traveling to the United States will no doubt be less than pleased by how expensive everything will have suddenly become for them while they are here compared to how cheap it all would have been at the beginning of August. However, in many ways, Lula's efforts to diversify Brazil's trading partners is looking even smarter than it did a few months ago (when it still looked really smart), because, as John McCain would say were he Brazilian, the fundamentals of Brazil's economy actually are strong.

That said, the sixteen cents is still a doozy, and it will be interesting to see where the exchange rates go from here....