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Brazil Real Advances on Euro Strength; Futures Yields Rise

Brazil’s real rallied to the strongest level in a month as the euro gained against the dollar and commodities rose, boosting demand for higher-yielding assets.

The real rose 1.2 percent to 1.5750 per dollar, from 1.5942 yesterday. It earlier reached 1.5745 per dollar, the strongest level since May 2, when the currency touched 1.5693.

Commodity prices, led by sugar, rose 0.4 percent after declining 1 percent yesterday, according to a UBS Bloomberg index. Brazil is the world’s biggest exporter of sugar, which gained 4.72 percent. The euro gained versus the dollar as German Chancellor Angela Merkel said she is committed to the currency and European Central Bank officials backed the creation of a euro-region finance ministry.

“There’s some reversal of the bears since yesterday,” said Nick Chamie, global head of emerging markets at RBC Capital Markets in Toronto. “The euro gaining is helping trigger some gains in Latin American currencies.”

Investor bets that the Brazilian central bank will raise rates again at its monetary policy meeting next week also boosted the real, said Reginaldo Galhardo, foreign exchange manager at Treviso Corretora, a Sao Paulo-based brokerage.

Central bank President Alexandre Tombini will raise borrowing costs 25 basis points to 12.25 percent when policy makers meet next week to set the benchmark Selic rate, according to trading in interest-rate futures contracts.

Most yields on interest-rate futures contracts maturing through January 2014 rose on concern the slowdown in inflation in Brazil will be temporary, according to Ures Folchini, head of fixed-income at Banco WestLB do Brasil SA.

Sao Paulo Inflation

Inflation in Sao Paulo slowed to 0.31 percent in May, less than half the 0.70 percent increase in April, the Foundation Economics Research Institute in Sao Paulo said today.

“With the inflation numbers and the scenario abroad, it would seem that the yields should be falling, but this isn’t happening,” Folchini said in a telephone interview from Sao Paulo. The market is viewing the inflation numbers “with much caution,” because of the consideration that price increases are losing steam due to seasonal factors.

Yields on the contract due in January 2013 rose two basis points, or 0.02 percentage point, to 12.49 percent.

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