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Brazil's central bank keeps propping dollar up, pushing real down

Section: Daily Dispatches

Brazilian Real Falls
On Central Bank Dollar Purchases

By Adriana Brasileiro
Bloomberg News Service
Tuesday, September 5, 2006

RIO DE JANEIRO -- Brazil's real weakened today on expectations the central bank will step up dollar purchases to rein in the currency's rally.

The central bank, which has been buying the U.S. currency on a daily basis for two months, bought dollars yesterday in an auction for 2.1295 reals each. Still, the real, which closed at a four-month high yesterday, is expected to keep strengthening in coming weeks on optimism dollar flows from investments and exports will stay strong, said Questus Patrimonio's Octavio Vaz.

"The central bank is gradually increasing dollar purchases in the daily auctions because the trend for the real is clearly positive," Vaz, who helps manage 70 million reais ($32.9 million) at Rio de Janeiro-based Questus, said in a phone interview. "If the bank doesn't act more heavily, the real will go through the roof."

The real fell 0.3 percent to 2.1285 to the dollar at 11:25 a.m. New York time from 2.1230 yesterday, its strongest close since May 11. The real has climbed 9.7 percent in the past 12 months, the best performance among the 16 most-traded currencies tracked by Bloomberg.

Brazilian exports rose to a record $13.6 billion in August, an increase of 20 percent from a year earlier, the government said in a Sept. 1 report. Exports may surpass $132 billion this year, an increase of 12 percent over 2005, Trade and Development Minister Luiz Fernando Furlan said Aug. 21.

Foreign investors, lured by higher yields relative to U.S. Treasuries, have also helped boost the real's value against the dollar, Vaz said.

Brazil's industrial output rose 3.2 percent in July from a year earlier as production of machinery and other capital goods picked up. The rise comes after an unexpected decline of 0.6 percent in June, the government said in Rio de Janeiro today. The result topped the median 3.1 percent forecast from 16 economists in a Bloomberg survey.

After stripping out seasonal factors, output rose 0.6 percent in July from June, below the median 1 percent increase for the indicator in a Bloomberg survey of 17 economists.

The dollar futures contract for Oct. 1, 2006, settlement, the most-widely traded on the BM&F commodity and futures exchange in Sao Paulo, changed hands at 2.139 reais per dollar from 2.1351 per dollar yesterday.

Brazil's local bond yields were little changed ahead of a weekly government debt auction today. The Treasury plans to sell as much as 5 billion reais worth of zero-coupon, fixed-rate bonds due in 2007, 2008 and 2009 in an auction today. The results are due after 1:30 p.m. New York time.

The yield on Brazil's benchmark zero-coupon, local-currency bond due January 2008 fell 1 basis point, or 0.01 percentage point, to 13.94 percent, according to Banco Pactual. Yesterday, the yield on the bond reached the lowest level since the security was first sold in July last year.

On foreign markets, the yield to the 2015 call date on Brazil's benchmark 11 percent bond due in 2040 fell to 6.41 percent, while the yield to maturity fell to 8.27 percent from 8.29 percent yesterday, according to JPMorgan Chase & Co. The bond's price rose 0.30 cent on the dollar to 130.90.

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