March 15 (Bloomberg) -- Brazil's real weakened for a fifth day in six on speculation the settlement of about $1.3 billion in government dollar-linked debt this week may boost demand for the U.S. currency.

Investor concern President Luiz Inacio Lula da Silva has lost political backing in congress needed to pass bills to boost growth and investment may also weaken the real, said Rodrigo Boulos, head trader at Banco Santos SA in Sao Paulo in an interview.

``We expect the Brazilian currency to weaken this week because of the settlement of dollar debt,'' said Boulos. ``We see the Lula government being weakened politically and that could delay the government's voting plan.''

The real weakened 0.1 percent to 2.9040 per dollar at 12:57 p.m. New York time from 2.9025 late Friday, boosting its decline in 2004 to 0.3 percent, the seventh-best performance against the dollar of the 16-most traded currencies. Elsewhere in the region, Chile's peso fell to a three-month low, the Mexican peso fell on speculation the central bank may reduce dollar auctions. While Colombia's extended gains.

Week Ahead

Banco Santos' Boulos said Brazil's real may weaken to as low as 2.95 per dollar this week.

Brazil's central bank has been paying off dollar-linked debt to take advantage of large trade surpluses and reduce the government's vulnerability to currency fluctuations.

The reduction in the amount of dollar-linked debt may trigger some companies to buy the U.S. currency to protect their assets or liabilities against foreign exchange fluctuations, Boulos said.

On Thursday, $1.3 billion in dollar-linked debt matures with another $2.25 billion coming due on April 1.

Boulos said Lula's political support has been weakened by weaker economic growth and allegations a former aide to his Cabinet chief took campaign contributions from an illegal gambling ring in Rio de Janeiro.

Weaker political support could prevent the government from passing legislation modernizing the country's bankruptcy law and laws modernizing the country's tax system, he said.

``Investors are looking for clear rules to start bringing money into Brazil,'' Boulos said.

Brazil's benchmark bond maturing in 2040 fell 0.65 cent on the dollar to 106.25, boosting its yield to 10.06 percent, according to J.P. Morgan Chase & Co.

Region

Chile's peso fell to a three-month low, declining 0.8 percent to 607.20 per dollar, boosting its loss in 2004 to 2.4 percent. The currency last traded at a weaker level on Dec. 11, when it reached 608.28 per dollar.

Mexico's peso fell 0.5 percent to 11.0060 per dollar from 10.9570 late Friday, paring its gain in 2004 to 2.1 percent, the best performance against the dollar among the 16 most-traded currencies.

Mexico's central bank will change the rules by which it auctions U.S. dollars into the currency market in a bid to even out swings in its daily sales and keep traders from betting heavily on how much will be sold.

The bank said in a statement that from the dollars it accumulates each quarter from oil sales and government borrowings, it will sell half of them to banks over the following year. Currently, the bank sells the dollars in the following quarter.

Colombia's peso gained for a third day, adding 0.5 percent to 2,655.20 per dollar, boosting its gain in 2004 to 4.70 percent, the second-best performance against the dollar of the 60 currencies tracked by Bloomberg.

Argentina's peso gained for a second day, adding 0.1 percent to 2.9085 per dollar from 2.9125 late Friday. Peru's new sol was unchanged at 3.4609 per dollar from 3.4610 late Friday.

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

Last Updated: March 15, 2004 12:58 EST