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Brazil plans sovereign wealth fund to counter rising currency

Section: Daily Dispatches

By Jonathan Wheatley
Financial Times, London
Sunday, December 9, 2007

SAO PAULO, Brazil -- Brazil will create a sovereign wealth fund with the primary aim of intervening in foreign exchange markets to counter the appreciation of Brazil's currency, according to finance minister, Guido Mantega.

"It will have the function of reducing the offer of dollars in the market and helping the real to appreciate less," he told the Financial Times.

His statement adds to controversy surrounding the fund, first announced by Mr Mantega in October. Since then, funding plans and objectives have undergone several revisions. The uncertainty has caused concern among investors and officials at the country’s central bank. The SWF appears to differ substantially from funds operated by other countries.

Under Mr Mantega's original plan, the SWF would have drawn on Brazil's foreign reserves, which have risen quickly this year to about $180bn. That plan sparked a behind-the-scenes row between the finance ministry and the central bank.

Darwin Dib, economist at Unibanco, a Sao Paulo bank, said the plan was unorthodox and that that level of firepower would have no lasting impact on exchange rates. He said the proposal raised doubts over the government's commitment to Brazil's floating exchange rate regime.

"The big victory for the central bank," a central bank official said, "is that the fund will have nothing to do with Brazil's foreign reserves and nothing to do with the central bank."

But in an interview with the Financial Times in Brasilia last week, Mr Mantega said the fund would indeed affect the accumulation of reserves and would share the central bank's source of funding at the national treasury.

Under current rules intervention in currency markets is the sole prerogative of Brazil's central bank.

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