Brazil's central bank intervenes in currency market to support U.S. dollar

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Brazil Real Weakens as Central Bank Steps Up Dollar Purchases

By Katia Cortes
Bloomberg News Service
Friday, August 11, 2006

http://www.bloomberg.com/apps/news?pid=20601086&sid=aZJC7DlXtORA&refer=l...

BRASILIA -- Brazil's currency weakened after the central bank stepped up dollar purchases in a bid to boost foreign reserves and slow the real's appreciation.

The bank bought the U.S. currency in the spot market for 2.1620 reals per dollar in an auction today. The bank has offered to buy dollars on a daily basis for more than a month.

"The bank is stepping up purchases because it aims to prevent the real from gaining too much at a time when investors seeking higher rates are approaching Brazil," said Alan Gandelman, a partner at Rio de Janeiro-based AgoraSenior Corretora, Brazil's biggest stock exchange.

The real fell 0.4 percent to 2.1650 per dollar at 3:40 p.m. New York time, after most trading in Brazil had ended, from 2.1565 per dollar yesterday. The currency has gained 9.2 percent in the past 12 months, the best performance among the 16 most-traded currencies tracked by Bloomberg.

The dollar futures contract for Sept. 1, 2006, settlement, the most-widely traded on the BM&F commodity and futures exchange in Sao Paulo, changed hands at 2.1755 reais per dollar from 2.1705 yesterday.

The real also fell today after a U.S. report showed retail sales in the world's biggest economy rose more than forecast in July, fueling concern the Federal Reserve may have to lift borrowing costs again this year. Higher U.S. rates reduce the spread, or extra yield, on assets in riskier emerging markets.

"U.S. retail sales rose more than expected, which goes against the thesis that the U.S. economy is loosing steam," said Tony Volpon, chief economist at Sao Paulo-based CM Capital. "A stronger economy prompts investors to migrate to the U.S. seeking higher rates, helping the dollar to strengthen and other currencies, like the real, to weaken."

Investors took advantage of the real's rally this week to an almost three-month high to sell the Brazilian currency, said Carvalho. For the week, the real has gained 0.8 percent against the dollar.

"It's very natural for the real to fall a bit today after rising all week," he said. "Some investors are taking the opportunity to take profits and are probably using the stronger-than-expected retail numbers in the U.S. as an excuse."

The real may resume its rally in coming days as strong growth and falling interest rates boost investor confidence, said Francisco Carvalho, currency desk manager at Liquidez Corretora DTVM.

A report released today showed inflation in Latin America's biggest economy held at a seven-year low last month. Annual inflation, as measured by the benchmark IPCA index, stayed at 4 percent in the 12 months through July. Slower inflation helps preserve the value of real-denominated assets.

"The scenario is favoring a continuing appreciation of the real against the U.S. dollar," Carvalho said in a phone interview from Sao Paulo. "Investors' risk perception has improved, we continue to have strong inflows from exports, and the perspective is for interest rates to keep falling."

Earlier today, the real traded as high as 2.1544, its strongest level since May 17.

The yield on the benchmark zero-coupon, local-currency bond due January 2008 rose 4 basis points, or 0.04 percentage points, to 14.53 percent, according to Banco Pactual.

On foreign markets, the yield to the 2015 call date on Brazil's benchmark 11 percent bond due in 2040 rose to 6.56 percent, while the yield to maturity rose to 8.373 percent from 8.351 percent yesterday, according to JPMorgan Chase & Co. The bond's price, which moves inversely to the yield, fell 0.30 cent on the dollar to 129.45.