Jan. 7 (Bloomberg) -- Brazil's central bank said it will start holding daily auctions to buy dollars for the first time in five years in an effort to stem a rally in its currency that threatens to slow an export-led economic recovery.

The bank's auctions will replace daily purchases the Treasury had been making -- without regular notice to investors - - of about $115 million a day through state-run Banco do Brasil SA in the fourth quarter of 2003, bank President Henrique Meirelles said yesterday. He said the bank will buy a similar amount. The bank hasn't made regular dollar purchases since it allowed the real to float against the dollar in 1999.

Policy makers run the risk of indicating that they're targeting a level for the real, which might prompt traders to try to push it through that level, said Carlos Gandolfo, a partner at Pioneer Corretora Ltda., which handles about a third of trading in Brazil's $1 billion-a-day currency market.

``If the market senses a limit, that limit will be attacked and attacked viciously,'' Gandolfo said in a telephone interview from Sao Paulo. ``If they want to maintain a market currency, they'll have to prevent any idea of a upper or lower limit for the real.''

The real fell as much as 0.7 percent to 2.8830 reais to the dollar today before reversing losses. It was up 0.2 percent at 2.8585 reais to the dollar at 11:30 a.m. New York time.

Brazil's currency surged 22 percent in 2003, reversing much of a 35 percent tumble the year before and prompting companies such as steelmaker Cia. Siderurgica Nacional and shoemaker Sao Paulo Alpargatas SA to say it was becoming harder to export.

Foreign Reserves

The tumble in the real in 2002 paved the way for a 21 percent surge in Brazil's exports to a record high last year. That export growth helped ease the slump in South America's biggest economy and President Luiz Inacio Lula da Silva has said his administration is counting on exports to lead an expansion this year.

Meirelles said the dollar purchases will also help the central bank boost its foreign reserves. Reserves, excluding loans from the International Monetary Fund, total $17.3 billion, equal to about 15 weeks of imports. That's down from $55.4 billion in April 1998.

``It's sort of clever trying to accumulate reserves at this point when you have country risk at historic lows, a strong currency and the huge amount of dollar inflows from exporters,'' said Alexandre Sant'Anna, who helps manage about 1.2 billion reais at ARX Capital Management in Rio de Janeiro. ``Last year's dollar purchases didn't effect the real in a significant way.''

An increase in reserves may help the government win concessions from the IMF allowing it to raise spending on social and infrastructure projects, Gandolfo said.

``The more reserves you have, the easier it will be for the government to win concessions from the IMF to spend more,'' Gandolfo said.

Last Updated: January 7, 2004 12:20 EST