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Real Gains, Paring Weekly Decline, on Brazil Central Bank Signal

Dec. 16 (Bloomberg) -- The real advanced for a second day, paring a weekly decline, as investors speculated Brazil’s central bank may act to contain further declines in the currency, while the outlook for faster U.S. growth boosted demand for emerging-market assets.

The real strengthened 0.5 percent to 1.8513 per dollar today, from 1.8602 yesterday. It slid 2.9 percent this week, the third-worst performance among 25 emerging-market currencies tracked by Bloomberg.

Brazil’s decision yesterday to lend out foreign reserves is a sign to Citigroup Inc. that policy makers are seeking to stop a slide in the real that may limit their ability to cut interest rates. Commodities rose today as better-than-forecast U.S. data indicated the world’s biggest economy -- and Brazil’s second-largest trading partner -- is strengthening.

“The signal is that the central bank will act if the dollar continues to rise,” said Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA in Sao Paulo. “Some of the optimism on yesterday’s indicators out of the U.S. is holding.”

The central bank held an auction yesterday to sell dollars and repurchase them as soon as one month later, bringing back a mechanism it last used after Lehman Brothers Holdings Inc. collapsed in September 2008. While no bids were accepted, the real extended gains after the announcement. The move is a signal that policy makers are seeking to cut rates further, said Ram Bala Chandran, a Latin American currency and rates strategist at Citigroup.

Growth Outlook

Brazil has room to rely on monetary policy to weather a global crisis, and the country will grow 4.5 percent to 5 percent next year, President Dilma Rousseff told reporters today in Brasilia. Latin America’s biggest economy has no leeway to grant public servants wage increases amid a “violent global crisis,” she said.

U.S. initial jobless claims unexpectedly dropped to a three-year low, according to data released yesterday, and Federal Reserve gauges of manufacturing in the New York and Philadelphia regions topped estimates.

Brazil’s currency has tumbled 14 percent in the past four months, the fourth-steepest drop in emerging markets, after the central bank’s move to start cutting borrowing costs in August deepened a worldwide selloff of riskier assets sparked by Europe’s mounting debt crisis. Brazil’s policy makers have cut the benchmark Selic by half a point three times since then, to 11 percent.

Interest-Rate Futures

In the Brazilian interest-rate futures market, yields on the most-active contracts mostly rose after a gauge of inflation showed prices rising more than forecast. The yield on the contract due in April 2013 climbed two basis points, or 0.02 percentage point, to 9.97 percent. The rate climbed seven basis points this week, the third weekly rise for that maturity.

The IPC-S index released today by the Rio de Janeiro-based Getulio Vargas Foundation showed a 0.72 percent monthly increase in consumer prices in Brazil’s 12 biggest cities through Dec. 15. That was higher than all 18 estimates compiled by Bloomberg. The median projection was 0.65 percent.

The report follows yesterday’s IGP-10 from the same institution. While the index covering Nov. 11 to Dec. 10 showed a slowdown in overall inflation, which includes wholesale prices, the increase in consumer items accelerated to 0.65 percent from 0.31 percent in the preceding period.

“If inflation proves resilient, there will be less space for the central bank to cut rates to the single digits in 2012,” Rostagno said. “Food prices are accelerating. That increases the risk that inflation will surpass the top end of the target range at the end of the year.”

Inflation Target

The central bank targets inflation of 4.5 percent plus or minus two percentage points. Consumer prices will likely rise 6.5 percent in 2011, according to the median forecast in the central bank’s weekly survey of about 100 economists published Dec. 12. Inflation will end next year at 5.42 percent, the survey showed.

Annual inflation was 6.64 percent in November, according to the national statistics agency.

To contact the reporters on this story: Alexander Cuadros in Sao Paulo at acuadros@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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