Brazilian Real Strengthens as Inflation-Adjusted Rates Attract Investors

Brazil’s real gained as the country’s economic expansion and world’s second-highest inflation-adjusted interest rates lured investors seeking refuge from the debt crises in Europe and the U.S.

The real advanced 0.1 percent to 1.5391 per U.S. dollar at 5 p.m. in New York, from 1.5400 yesterday. The currency has advanced 7.9 percent this year.

Brazil’s central bank raised its benchmark lending rate for a fifth straight meeting last week to 12.5 percent in a bid to rein in inflation that’s accelerated to a six-year high.

“Brazil is demonstrating that it has a strong economy and a tendency to maintain high interest rates for a certain period of time,” Francisco Carvalho, currency director at Liquidez DTVM, said in a telephone interview from Sao Paulo. “This attracts capital.”

Policy makers said they twice bought dollars in the spot currency market today, first at 1.5331 reais per dollar and then at 1.5360 reais each. The dollar purchases are part of an effort by policy makers to curb the currency’s gains.

Yields fell on most interest-rate futures contract due after this year.

The yield on the contract due in January 2017 declined two basis points, or 0.02 percentage point, to 12.56 percent. The yield has increased 10 basis points since July 20 when policy makers didn’t include with a statement accompanying their decision to boost the benchmark Selic rate a commitment made in April and June to raise rates for a “sufficiently long” period.

‘Hawkish View’

Today’s decline in yields on longer-term contracts may be a result of investors “positioning themselves” ahead of Thursday’s release of the minutes from the July 19-20 policy meeting, said Vladimir Caramaschi, chief strategist at Credit Agricole Brasil SA in Sao Paulo.

“The most likely scenario at least for me, and I believe that many people share this view, is that the central bank will not hesitate on drawing a hawkish view of the situation,” he said by phone. “They’ll try to dispel any notion that they’re going to take a soft stance regarding inflation and the interest rate. In that case, further hikes on the short-term would cause inflation to go down on the medium and long-term and as such that would help longer rates to go down.”

To contact the reporters on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net; Benjamin Bain in New York at bbain2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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