Brazil Eases Reserve Requirement on Banks to Buoy Currency

Brazil’s central bank reduced reserve requirements on short dollar positions held by local banks as it steps up efforts to buoy the real, the worst performing major currency this year.

Starting Dec. 20, banks will be required to deposit in cash at the central bank 60 percent of their short positions in U.S. dollars above $3 billion, up from a previous limit of no more than $1 billion or any amount in excess of its capital base, the central bank said in a statement. The real strengthened 0.2 percent to 2.0992 per U.S. dollar at 1:10 p.m. local time.

The government started this month loosening capital controls it imposed in the past two years after the real tumbled to a three-year low on Nov. 30 and the economy grew at half the pace forecast by economists in the third quarter. Brazil is facing a different situation now compared with early 2011, when measures were implemented to slow capital inflows, said Tulio Maciel, the head of the central bank’s economic research department.

“This is one more measure that removes breaks put in place in the past, when the dollar was at 1.75 and people saw it going to 1.50,” Ures Folchini, the head of fixed income at Banco WestLB do Brasil SA in Sao Paulo, said in a phone interview. “Given the dollar is at a new level the government considers more acceptable, the central bank is cleaning house.”

Half the Pace

Brazilian banks’ short dollar position was $3.65 billion on Dec. 14, Maciel said today. That compares with banks’ $914 million long dollar position last month. Banks short dollar position was $16.8 billion in December 2010, just before the government introduced reserve requirements to deter bets against the dollar.

Brazil’s economy expanded 0.6 percent in the third quarter, the national statistics agency said Nov. 30, as government stimulus efforts failed to revive investment that fell for the fifth straight period. The growth number was lower than the forecasts of all 54 economists surveyed by Bloomberg whose median estimate was for 1.2 percent expansion.

The real has weakened 11 percent this year, the worst performance among the 16 most-traded currencies tracked by Bloomberg.

To contact the reporters on this story: Andre Soliani in Brasília at asoliani@bloomberg.net; Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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