Brazil's decision last Wednesday to widen the real's currency band - an effective 9 per cent devaluation - prompted heavy falls on world stock markets. Traders feared Brazil would squander central bank reserves in an attempt to defend the new currency band.
On Friday, shares soared after the Brazilian Central Bank said it would not intervene in the markets pending an announcement today. Analysts were relieved that Brazil would not try to defend an indefensible exchange rate. Some speculated that a free-floating currency could help kick-start Brazil's troubled economy.
However, City experts said yesterday that last week's share gains could be reversed as the markets digest the consequences of letting the real float. Some fear a severe drop in the real's value could prompt hyper- inflation or debt defaults.
Nick Stamenkovic at Bank Austria Creditanstalt Futures said: "Brazil is not out of the woods yet by any means. But the decision of the central bank not to intervene in the markets has at least removed some of the uncertainties."
Other countries with currency pegs - such as Argentina - are likely to come under pressure, according to analysts. There are also mounting worries about China, where a number of leading companies have revealed larger- than-expected levels of bad debt.
In the UK, attention will be focused on a clutch of official data out this week, including inflation and an estimate of fourth-quarter growth. Taken together, the data are expected to paint a picture of a rapidly slowing domestic economy.
A survey released yesterday by Euler Trade Indemnity revealed that excessive discounting by UK companies had led to a sharp fall in profits. A study by Dun & Bradstreet pointed to deteriorating employment intentions and low confidence among high-street retailers.
However, the Dun & Bradstreet survey also found that many companies had reacted positively to the recent string of interest-rate cuts by the Bank of England. Exporters, in particular, had been cheered by the Bank's moves: the D&B survey revealed the largest jump in export confidence for six years.
Philip Mellor, senior D&B business analyst, said: "Successive interest- rate cuts coupled with a fall in sterling have helped to bolster business confidence."
Gavyn Davies, page 15Reuse content