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Brazil Real Falls Most Among Major Currencies in Commodity Drop

Brazil’s real declined the most among major currencies as a drop in commodities reduced demand for the assets of raw-material exporters.

The real fell for the first time in five days, losing 1.3 percent to 2.4099 per dollar at the close as the Standard & Poor’s GSCI index of 24 raw materials slipped 0.4 percent. Longer-term swap rates rose, with contracts maturing in January 2017 climbing three basis points, or 0.03 percentage point, to 12.68 percent as the falling real added to speculation that Brazil will keep raising borrowing costs to curb inflation.

“Many currencies related to commodities are losing value today, and the real is in the same direction,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil in Sao Paulo, said in a telephone interview. “The swap rates are following the losses of the real.”

Economists lowered their forecast for the currency at the end of 2015 to 2.53 per dollar from 2.51, according to the median estimate of about 100 economists in a weekly survey by the central bank. Policy makers will raise the target lending rate to 11.25 percent this year, compared with the previous week’s median forecast of 11 percent, according to the survey. The central bank lifted the benchmark by 50 basis points Jan. 15 for a sixth straight time, increasing it to 10.50 percent.

The real has dropped 4 percent in the past three months on concern that fiscal deterioration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will erode demand for emerging-market assets.

Currency Swaps

To support the currency and limit import price increases, Brazil’s central bank sold $197 million of foreign-exchange swaps today as part of daily offerings announced Dec. 18. It also held an auction to extend maturities on swaps due in March, rolling over $516.7 million.

President Dilma Rousseff has pledged to slow consumer price increases even amid signs of stagnating economic growth. Industrial production fell in December by the most since 2008 while inflation in 2013 exceeded the official target for a fourth straight year.

Inflation may further accelerate as Brazil’s drought forces the nation’s utilities to rely on expensive alternatives to hydroelectric power.

“The government will either have to raise energy rates, which will impact inflation, or absorb higher energy costs via fiscal policy,” Luis Otavio de Souza Leal, the chief economist at Banco ABC Brasil in Sao Paulo, said in a phone interview.

To contact the reporter on this story: Filipe Pacheco in Sao Paulo at fpacheco4@bloomberg.net

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

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