Brazil’s Real Drops After Fed Reduces Pace of Monetary Stimulus

Brazil’s real fell to a five-month low as the Federal Reserve said it will further cut bond purchases that have supported emerging-market assets.

The real depreciated 0.6 percent to 2.4373 per U.S. dollar at the close in Sao Paulo, the weakest level since Aug. 21. It dropped along with most developing-nation currencies after the U.S. central bank’s decision today. Swap rates on contracts maturing in January 2015 climbed 19 basis points, or 0.19 percentage point, to 11.43 percent, the highest in two years.

“With the Fed reducing stimulus, the competition for foreign capital increases,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil in Sao Paulo, said in a telephone interview. “Brazil is at a disadvantage there, which puts pressure on the currency.”

Finance Minister Guido Mantega defended the real yesterday, saying in an interview that a Morgan Stanley report calling the currency one of the “fragile five” amid an emerging-market selloff is groundless. In the U.S., the Fed said it will trim its monthly bond buying by $10 billion to $65 billion, sticking with its plan for a gradual withdrawal.

Mantega also said yesterday in the interview at his office in Brasilia that international reserves at almost record highs, a solid fiscal situation, a floating exchange rate and a sound financial system will allow Brazil to weather volatility as the U.S. reduces monetary stimulus. Morgan Stanley’s press office in Brazil didn’t respond to phone calls made after business hours yesterday seeking comment.

Fiscal Concern

Brazil’s real has dropped 10 percent in the past three months on concern fiscal deterioration will lead to a lower credit rating and amid speculation that the tapering of Fed stimulus will erode demand for Brazil’s assets. The government’s budget deficit as a percentage of gross domestic product narrowed to 3 percent in November from 3.4 percent in the prior month, which was the widest since 2009.

In Turkey, the lira erased its gain today following a rally triggered by the central bank’s decision to raise borrowing costs and return to a simpler monetary policy.

“Turkey had to tighten monetary conditions to increase demand” for its currency, Tony Volpon, the head of research for the Americas at Nomura Holdings Inc., said in a phone interview from New York. “In Brazil, the whole discussion is around the fiscal side.”

Brazil’s central bank sold $197 million of foreign-exchange swaps today under a program of daily auctions announced Dec. 18 to support the currency and limit import-price increases. It also extended the maturity on all of the $11 billion of swap contracts maturing Feb. 3 after an offering yesterday.

Annual Inflation

Annual inflation slowed to 5.63 percent through mid-January from a prior 5.85 percent pace, the national statistics agency said Jan. 23. Brazil is combating inflation in the context of a weaker real, central bank President Alexandre Tombini said at a presentation in London this week.

Policy makers raised the target lending rate by 50 basis points on Jan. 15 for a sixth consecutive time, increasing it to 10.50 percent.

Brazil’s outstanding loans grew 2.4 percent in December from a month earlier to 2.7 trillion reais, the central bank reported today. The personal loan default rate rose to 6.7 percent from a revised 6.6 percent.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Julia Leite in New York at jleite3@bloomberg.net

To contact the editor responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net

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