Brazil shocks markets with devaluation

Brazil8217;s foreign exchange policy has served as the anchor of the country8217;s four-year economic recovery after decades of high inflation. Its stability was crucial for international confidence in the world8217;s eighth biggest economy.

Markets have long considered the real overvalued but feared a devaluation might spark the kind of crisis of confidence among investors that plunged Russia and much of Asia into chaos after they bungled devaluations last year.

The news from Brazil immediately spilled over into global financial markets, with falls of nearly two percent in the US stock market and as much as five percent in European markets like the Frankfurt bourse.

The announcement sent shivers through the rest of Latin America. Announcing his resignation, Brazil8217;s Franco put a brave face on the crisis, saying he recognised that Latin America8217;s biggest economy needed to change its controversial economic policy mix of an overvalued currency and high interest rates.