Jan. 5 (Bloomberg) -- Brazil's real strengthened to a three-week high on expectations that dollar inflows will increase after U.S. policy makers indicated they may soon end an 18-month policy of raising interest rates.

The U.S. Federal Reserve on Jan. 3 said the number of additional rate increases needed to control U.S. inflation ``probably would not be large.'' The possible halt in U.S. rate increases may help attract more investors to Brazil, where interest rates are the highest in the world, said Hideaki Iha, a currency analyst at Corretora Souza Barros.

``The Fed comments are very positive,'' Iha said in a phone interview from Sao Paulo. ``The real still has some room to strengthen.''

The real rose 0.1 percent to 2.2842 per dollar at 2:16 p.m. New York time from 2.2860 late yesterday, increasing its gain in the last 12 months to 18.8 percent, the best performance against the dollar of the 16 major currencies.

At 4 p.m. in Sao Paulo (1 p.m. New York time), when most trading in Brazil ends, it exchanged hands at 2.2865 per dollar, compared with 2.2925 at the same time yesterday.

In earlier trading today, the currency rose as much as 0.8 percent to 2.2669, its strongest since trading at 2.2600 on Dec. 14, prompting some investors to sell reais to take advantage of its 3.7 percent rally since midday on Jan. 3, Iha said.

``Some people thought the real's appreciation has been exaggerated in the past two days,'' Iha said. ``That selloff, however, doesn't change the trend for the currency to keep appreciating.''

Inflows, Rates

The Brazilian real's 12.1 percent gain in 2005 was its third straight annual gain, fueled by record exports and rising foreign investment, lured by the country's high interest rates.

Brazil had net inflows of $18.8 billion in 2005, the most since 1992, according to a central bank report yesterday. The amount was triple the $6.36 billion of net inflows in 2004.

Brazil's benchmark overnight lending rate, the highest among 45 central banks tracked by Bloomberg, is 18 percent, compared with 4.25 percent in the U.S.

The Brazilian central bank today sold $420 million of currency swap contracts and bought dollars in the spot market as a part of its efforts to weaken the currency.

The yield to the 2015 call date on Brazil's benchmark 11 percent bond due in 2040 rose to 6.72 percent, while the yield to maturity rose to 8.35 percent from 8.33 percent yesterday, according to JPMorgan Chase & Co. The bond's price, which moves inversely to the yield, fell 0.35 cent on the dollar to 129.80. The bond closed at a record 130.15 yesterday.

Elsewhere in the region, Mexico's peso fell 0.6 percent to 10.6442 per dollar from 10.5820 per dollar late yesterday, Chile's peso fell 0.7 percent to 518.80 per dollar from 515.05 late yesterday, Colombia's peso rose 0.2 percent to 2,278.00 per dollar from 2,282.09 per dollar late yesterday and Argentina's peso weakened 0.3 percent to 3.0490 per dollar from 3.0395 per dollar. Peru's sol fell 0.2 percent 3.4410 per dollar from 3.4332 late yesterday.

To contact the reporter on this story: Romina Nicaretta in Sao Paulo at at Rnicaretta@bloomberg.net

Last Updated: January 5, 2006 14:33 EST