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Brazilian Real Gains as Central Banks Cut Dollar Funding Costs

The real advanced to the strongest in a week after the Federal Reserve cut the cost of emergency dollar funding for European banks as part of a globally coordinated response to alleviate a dollar shortage.

The real rose 1.9 percent to 1.8105 per dollar at 4:43 p.m. Sao Paulo time, from 1.8454 yesterday. It reached as high as 1.7950 earlier, the strongest since Nov. 21. The gain trimmed the real’s decline this month to 5.3 percent.

The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said today in a statement in Washington. Yields on Brazil’s interest-rate futures contracts fell on speculation policy makers in the South American country will accelerate cuts to borrowing costs today to join the global effort to provide monetary stimulus.

“They gave the markets a relief,” said Hideaki Iha, a currency trader at Fair Corretora de Cambio e Valores.

The Fed coordinated the cut to dollar funding costs with the European Central Bank as well as the Bank of Canada, Bank of England, Bank of Japan, and Swiss National Bank. Earlier today, China reduced the amount of cash that banks must set aside as reserves for the first time since 2008 to spur growth.

Yields on Brazil’s interest-rate futures contract due in January 2013 fell five basis points, or 0.05 percentage point, to 9.63 percent.

Traders are wagering the central bank will reduce the benchmark rate by at least 50 basis points to 11 percent at its monetary policy meeting today, followed by about another 100 basis points of cuts by April, futures show. Policy makers have cut the rate by 100 basis points since August.

Rate Outlook

“Some people are betting on a 75-basis-point cut today because of the coordinated central bank move,” said Ronaldo Patah, who manages 72 billion reais as head of fixed-income debt at Sao Paulo-based Itau Asset Management. “People are betting that the central banks might know something they don’t know.”

Patah forecasts a half-percentage point cut today.

The real gained earlier after China, Brazil’s biggest trading partner, announced the 50 basis point reduction to the reserve requirement ratio effective Dec. 5. China’s action supported the real as investors speculated the move will boost demand for Brazilian commodities, said Reginaldo Galhardo, head of currency trading at Treviso Corretora de Cambio in Sao Paulo.

“China is acting because of the fall in industrial activity,” Galhardo said in a telephone interview. “This means that China will continue buying commodities from Brazil.”

Trading Partners

China overtook the U.S. in 2009 as Brazil’s largest trading partner, buying everything from iron ore to soybeans. Commodity exports made up 11 percent of Brazil’s gross domestic product in 2010, according to the national statistics agency.

Commodity prices, as measured by the Standard & Poor’s GSCI Spot Index, rose for a third day, gaining 0.9 percent.

Brazil will force public entities and state companies to shift 57.6 billion reais ($32 billion) in bonds they hold linked to the overnight rate into other types of public bonds, Paulo Valle, Treasury under secretary, said.

The move seeks to help the Treasury improve Brazil’s debt profile by increasing investments in inflation-linked and fixed-rate bonds, Valle said to reporters in Brasilia.

The funds, known as “extra-market funds,” may now be deposited in the Caixa Economica Federal, ending the monopoly on such funds formerly held by Banco do Brasil SA. State-controlled oil company Petroleo Brasileiro SA is not affected by the new rules, Valle said.

Bond Demand

“It can be another source of demand for” Brazil’s zero-coupon and fixed-rate bonds, said Mauricio Junqueira, who helps oversee about $300 million at Squanto Investimentos in Sao Paulo.

Brazil’s new inflation calculation may reduce increases in the benchmark IPCA index by more than the 0.3 percentage point expected by most analysts, Valor Economico reported today.

IPCA inflation would have been as much as 0.59 percentage point lower over the past three years under the new calculation, according to estimates by the Finance Ministry, the Sao Paulo-based newspaper said. The ministry estimates were based on the IPCA in the 12 months through October in 2011, 2010 and 2009, according to Valor.

Brazil’s statistics bureau, known as IBGE, announced Nov. 28 the new composition of items it will use to estimate the IPCA benchmark inflation index, starting in January. The IBGE reviews the weighting of products and services on the inflation index every five years based on a family consumption survey, according to Eulina Nunes, coordinator of the IPCA index at IBGE.

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