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Brazilian Real Declines Most Since June on U.S. Economic Data

May 4 (Bloomberg) -- Brazil’s real, the worst performer among emerging-market currencies today, declined the most since June after lower-than-forecast growth in U.S. service industries and employment damped optimism about growth.

The real plunged 1.9 percent to 1.6182 per dollar, from 1.5876 yesterday, the biggest daily decline since June 4, when the currency lost 2.6 percent.

Brazil’s real fell after lower-than-forecast job growth in the U.S. raised concern that a slowdown in the world’s largest economy will cut demand for emerging-market assets. Government efforts to curb the real are reducing dollar inflows, driving up costs for dollar loans and eroding the yield advantage of Brazilian assets, said Ram Bala Chandran, a Latin American currency and rates analyst at Citigroup Inc.

The yield differential between Brazilian and U.S. assets “basically collapsed,” after the government increased taxes on foreign loans and debt sales, Bala Chandran said in a telephone interview from New York. “Coupled with the broader sell off in the market, people are just getting out,” he said.

The ADP Employer Service’s tally of U.S. jobs growth in April was 179,000, trailing the 198,000 median forecast of economists in a survey. The S&P 500 extended losses as the Institute for Supply Management said its gauge of non-manufacturing companies slumped to the lowest level in eight months.

Brazil’s tax increase on foreign loans and debt sales helped reduce the amount of dollars that entered the country last month by 88 percent. Brazil received a net $1.54 billion in April from trade and investments, down from $12.7 billion in March and $2.25 billion in April 2010, according to data published by the central bank today.

Rate Futures

Yields on Brazilian interest-rate futures contracts rose after central bank President Alexandre Tombini said he would increase borrowing costs as long as needed to tame inflation.

Yields on the futures contract due in January 2012, the most actively traded today in Sao Paulo, rose two basis points, or 0.02 percentage point, to 12.34 percent. The contract due in January 2013 climbed three basis points to 12.69 percent.

Tombini yesterday pledged in an interview with Globo News TV that policy makers will bring inflation back to their target next year.

“It’s not a 100-meter sprint, it’s a long process” he said. “Obviously, the monetary policy instrument that will get inflation back to its 4.5 percent target in 2012 is the conventional instrument that is being used, and will continue to be used for as long as necessary.”

Inflation Target

President Dilma Rousseff’s administration is relying on a mix of higher borrowing costs, measures to curb credit growth and spending cuts to bring the fastest inflation in 29 months back to policy makers’ target in 2012. Tombini said interest rates remain the favored tool for fighting inflation.

“It seems that the central bank maybe won’t use macroprudential measures as much and will rely more on interest-rate increases,” Newton Rosa, chief-economist at Sul America Investimentos, said in a telephone interview from Sao Paulo.

Yields on interest-rate futures contracts due in the short and long term are rising because investors are betting it will be difficult for the government to bring inflation to target with a strategy of gradual rate increases, said Mauricio Junqueira, who helps oversee $300 million of assets at Squanto Investimentos in Sao Paulo.

“The inflation scenario continues to be very dangerous,” Junqueira said in a telephone interview. “It would be better if they did something quicker and stronger, but the government doesn’t want to because they’re afraid of currency appreciation.”

To contact the reporters on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net; Josue Leonel in Sao Paulo at jleonel@bloomberg.net

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

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