Brazil Stops Fighting the Flight

SAO PAULO: With Brazil's "controlled devaluation" blowing up in its face, the new management at the nation's central bank is letting the speculators have their way with the real. In a statement, the bank said it "will not intervene in foreign exchange markets today" and promised a new policy statement on Monday. "Brazil is taking the advice that the U.S. has given them," says TIME senior economics reporter Bernard Baumohl: "Stop using valuable resources to defend the currency when there's so much pressure to devalue."

Left unprotected, the value of the real quickly went into free fall Friday. But the bank's temporary surrender was applauded by the stock markets: Brazil's BOVESPA leapt 27 percent on the news (for foreign investors, Brazilian stocks are now bargains in their home currency) and Wall Street followed suit with a relief rally that pushed the Dow up 120 points by midmorning. U.S. Treasury officials and the IMF are keeping credit lines at the ready, still committed to quelling another Asian crisis (quickly dubbed the "samba effect") before it starts. "An accurate devaluation is good for Brazil," says Baumohl. "It allows them to relax interest rates, which will minimize the duration of the recession there." Perhaps by Monday, currency markets will realize that the only thing pushing Brazil toward collapse is them.