Nov. 4 (Bloomberg) -- Brazil’s real gained for a second day after the U.S. Federal Reserve said it will keep borrowing costs “exceptionally low” for an “extended period,” generating investment flows to Latin America’s largest economy.

The currency strengthened 1.2 percent to 1.7246 per U.S. dollar at 2:24 p.m. New York time, from 1.7446 yesterday.

“Businesses are still cutting back on fixed investment and staffing, though at a slower pace,” the Federal Open Market Committee said in a statement today after meeting in Washington. Officials kept their benchmark overnight lending rate at between zero and 0.25 percent, where it has been since December.

If American policy makers maintain their commitment to keeping interest rates low for an extended period, “investors in Brazil will know liquidity remains firm and high-risk assets can keep rising,” said Marcelo Saddi Castro, chief investment officer at SulAmerica Investimentos, who manages 12 billion reais ($6.95 billion). “Brazil is still the little darling of international markets.”

Saddi Castro predicts the real will not rise further than 1.7 per dollar, due to government intervention on the foreign- exchange market and increasing imports.

Capital Inflows

Brazil had net capital inflows of $14.598 billion in October, compared with an inflow of $1.365 billion in September, according to central bank data released today on its Web site.

The flow data was very “robust,” said Zeina Latif, chief economist at ING Bank in Sao Paulo. Bond issues and initial public offerings of stocks “in the pipeline will guarantee that future flows are decent,” she said in a phone interview from Sao Paulo. Latif expects the real to weaken to 1.77 per dollar by the end of December if the greenback rises against major currencies.

Higher commodity prices around the world also helped the real today, said Eduardo Duarte, a broker at Liquidez Corretora in Sao Paulo. Liquidez predicts the real will weaken to 1.9 per dollar by the end of the year, as Brazil’s trade balance deteriorates.

The real has strengthened 34 percent this year versus the dollar, the best performance among 26 emerging-market and 16 major currencies tracked by Bloomberg, and has a carry return of 44 percent in 2009, the most of over 170 currencies. Carry trade involves selling currencies of nations with low borrowing costs to buy those of countries where interest rates are higher, such as Brazil, where the central bank’s benchmark rate is 8.75 percent.

Weakening for Sustainable Growth

Brazil’s currency needs to weaken as much as 19 percent for sustainable economic growth, said Nelson Barbosa, the Brazilian Finance Ministry’s top policy adviser. The real needs to be at 2.1 to 2.13 per U.S. dollar for growth, Barbosa told reporters at an event in New York.

Barbosa also said the government is “satisfied” with the impact of a tax on foreign capital investments in stocks and bonds. The real has lost 0.3 percent since the so-called IOF tax was announced on Oct. 19.

In the overnight interest-rates futures market, the yield on the contract due January 2011 fell three basis points, or 0.03 percentage point, to 10.22 percent, according to Bloomberg data.

Consumer prices rose 0.25 percent in October, according to the Foundation Economics Research Institute in Sao Paulo. The median estimate by 22 economists in a Bloomberg survey was for an increase of 0.23 percent, after a 0.16 percent gain in September.

“Inflation is tame and retail sales are good but not booming,” said Saddi Castro. “This decreases the risk of the central bank raising rates sooner rather than later.”

To contact the reporter responsible for this story: Camila Fontana at cfontana@bloomberg.net

Last Updated: November 4, 2009 14:40 EST