UPDATE 3-World in a "currency war," Brazil finmin says

Mon Sep 27, 2010 2:49pm EDT

* Strength of Brazil's real hurting exporters

* Mantega blames United States, Europe and Japan

* Brazil central bank stepping up forex interventions (Adds comments)

By Samantha Pearson and Aluisio Alves

SAO PAULO, Sept 27 (Reuters) - The world is in an "international currency war" as governments manipulate their currencies to improve their export competitiveness, Brazilian Finance Minister Guido Mantega said on Monday.

Mantega's speech to Brazilian industrial leaders included some of the strongest comments to date by any senior government official on the recent bout of currency intervention by countries, including Japan and China.

Brazil's currency, the real BRBY, is now the world's most overvalued major currency, according to Goldman Sachs.

Near a 10-month high against the dollar, the real continued to rise after Mantega's comment as traders bet the government may be waiting for the outcome of Sunday's presidential election before taking action.

"We're in the midst of an international currency war," Mantega said. "This threatens us because it takes away our competitiveness."

With some economies still reeling from the global financial crisis, countries have sought to weaken their currencies to boost exports and improve trade balances.

Currency intervention is likely to be a hotly disputed topic at the next meeting of the International Monetary Fund in Washington, D.C., Oct. 8-10.

Japan, Colombia, Thailand and other countries have been seeking to weaken their currencies to help accelerate their economic recovery. For details, see [ID:nTOE68F05F].

Low interest rates across much of the developed world have also prompted investors to pour cash into higher-yielding assets in countries such as Brazil, causing further outcry.

"The advanced countries are seeking to devalue their currencies," Mantega said, mentioning the United States, Europe and Japan in the context of what he portrayed as an intensifying trade competition.

Mantega has repeatedly tried to talk down the real. The government last week threatened to use the sovereign wealth fund to buy dollars.

But the government has been reluctant to follow through with concrete measures, and traders bid up the currency near the 1.70 per dollar level, which some see as the threshold for new, stronger action by the government.

Last week's share offering by state-oil company Petrobras (PETR4.SA) contributed to a large inflow of dollars to Brazil, which is attractive to foreign investors because of high interest rates and its booming economy.

Mantega said the country still has an arsenal of tools available to weaken the real, although he did not offer details. Mantega said the government was not considering additional taxes on foreign investments but noted that the government has imposed such controls to hold back the real in the past.

MORE MEASURES COMING?

The remarks could be a sign that Brazil's government will beef up efforts to weaken its currency, said Raphael Martello, an analyst with Tendencias consultancy in Sao Paulo.

"He could be preparing the way for a stronger intervention. Since Japan intervened in the currency market, it gave other countries a justification to do the same thing," Martello said.

Tony Volpon, head of emerging market research for the Americas at Nomura Securities, added that Mantega's could also simply be "a conditional threat he hopes not to have to act upon."

Japanese authorities intervened to sell yen on Sept. 15, the first such intervention since March 2004. [ID:nTOE68E02W]

And the United States has vowed to rally global heavyweights on China's currency, the yuan, which many economists say is undervalued. (Editing by Brian Winter and Kenneth Barry)

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