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Tags: Brazil | Boom | Drive | Dollar

Brazil's Boom Will Drive Dollar Rally

By    |   Friday, 09 May 2008 02:18 PM EDT

Brazil has had some really good fortune come its way lately. Just last week it got a simultaneous investment grade rating from Standard & Poor's on its sovereign debt and on nine of its banks.

As this happened, they were able to sell more than $500 million in bonds as pension funds and hedge funds from around the world rushed into Brazil to buy up its bonds, not to mention its stocks and real estate.

Meanwhile, Brazil's tax revenue jumped 13 percent just last month as household income increased, unemployment decreased, and a boom in real estate all added new money into the government's coffers.

Brazil has been hot, and it will be for a long time. Why? Well, their economy expanded 6.2 percent just in the fourth quarter alone. That's its highest growth rate since 2004.

Brazil's currency, the real, has now gained 28 percent against the buck in the last four years. That's the very best performer of the top 16 currencies of the world.

Things have never been better for Brazil. Petrobras, the state-owned oil company, is hiring another 14,000 engineers, geologists and drillers as it taps into the biggest crude discovery in the Western Hemisphere since 1976.

In fact, this latest oil find may allow Brazil to overtake all of the output of OPEC with the exception of Saudi Arabia. So this will be huge. It will provide a huge base going forward for them to divert some of that oil money into other viable investments so that they diversify their risks and income streams.

So what's a country to do with all of this newfound money?

It just keeps pouring in. Demand for their commodities continues to pump cash into their economy. They already have foreign exchange reserves that have doubled since 2006 to a whopping $195 billion.

Not bad for a country that had trouble paying back its debt not too many years ago.

The government has many options to consider. I think they've decided not to touch their reserves but instead to start a $20 billion sovereign wealth fund (SWF) that would take the cash and diversify it into many different investments.

For now, Brazil will take the proceeds from the recent bond sale and pay off more expensive debts. Then it will focus on the sovereign wealth fund, which will invest in U.S. dollars with part of that $20 billion.

Brazil also will take some of the $20 billion and buy fixed-income assets as well.

Brazil is becoming more solid all the time and as it diversifies its income streams the country is only going to do better and make a brighter, more stable future for its citizens.

I find it interesting that Brazil feels that buying dollars at this point in time is a worthwhile investment. You only buy things because you think they will go up in value, at least as far as investments are concerned.

Even commodity guru Jim Rogers thinks that there will be a dollar rally. But he estimates that it might only last a year. He's going to use that dollar rally to finally exit his dollar denominated assets, he says.

He also stated another reason why the U.S. dollar may rally for about a year, which is that America is a huge agricultural producer. If Rogers is right on agriculture, which he thinks will go up a lot, then a dollar rally would help America, relative to countries that don't have agriculture going for them.

So, in the near term, you can see that both Brazil and Jim Rogers are betting on the greenback. In the longer run, Rogers believes the commodity dollars (the Australian, New Zealand and Canadian dollars) will do better than those that aren't commodities exporters during this commodities boom.

In fact, he especially emphasized his Aussie dollar position. Since Brazil is also a "commodity currency," I believe the real will prosper right along with these others that Rogers mentions.

As Brazil's prosperity continues on exports of its high-flying commodities — like soy and sugar cane and, soon enough, crude oil — expect it to buy more dollars in the next year. Expect the euro and pound, too, to be weighed down in the next six to 12 months as dollar buying activity hits the EUR/USD and GBP/USD.

So, the U.S. dollar will do well in the upcoming months as the euro and pound have both reached extremes in their currencies that are unsustainable for now.

Even the foreign central banks want the dollar to grow against their currencies so that the pain felt by their exporters will die down. And, so far, this is exactly what we've seen over the last month or two as the euro has fallen over 650 pips (3.75 percent) against the dollar. Now that's a dollar rally!

Don't get me wrong. Over the years, the dollar will have problems. In the mean time, there's money to be made by investing in dollars over the coming months, possibly as long as a year.

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Brazil has had some really good fortune come its way lately. Just last week it got a simultaneous investment grade rating from Standard & Poor's on its sovereign debt and on nine of its banks. As this happened, they were able to sell more than $500 million in bonds as...
Friday, 09 May 2008 02:18 PM
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