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Brazil Real Drops to One-Month Low on Slower China Growth Target

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March 5 (Bloomberg) -- Brazil’s real weakened to the lowest level in a month after China cut its growth target, stoking concern a drop in demand from Brazil’s biggest trading partner will undermine growth in Latin America’s largest economy.

The real weakened 0.5 percent to 1.7395 per U.S. dollar, the lowest close since Jan. 31, from 1.7304 on March 2. The yield on the Brazilian interest-rate futures contract due in January 2013 was unchanged at 9.03 percent.

The real fell with most other major and emerging-market currencies and commodities after China pared its economic growth target to 7.5 percent from an 8 percent goal in place since 2005, a signal that leaders are determined to cut reliance on exports and capital spending in favor of consumption.

The move fueled speculation slower growth in China will curb inflows by limiting demand for Brazilian assets, said Hideaki Iha, a currency trader at Fair Corretora de Cambio e Valores in Sao Paulo.

“The drop in China’s GDP target helped sustain the dollar,” Iha said in a telephone interview. “We’re a big partner of China and we may be selling less to them.”

The currency extended declines after Brazil’s central bank said it bought dollars in the spot market at an auction today for 1.7346 reais each.

Yields on interest-rate futures contracts erased earlier increases as investors speculated central bank President Alexandre Tombini may accelerate the pace of interest-rate cuts at this week’s monetary policy meeting.

Inflation

Consumer prices will increase 5.2 percent next year, according to the median forecast in a March 2 central bank survey of about 100 analysts published today, up from an estimate of 5.11 percent the previous week and 5.02 percent two weeks ago. Policy makers signaled in the minutes of their January meeting that they’re likely to reduce the benchmark rate below 10 percent this year.

Annual inflation slowed to 6.22 percent in January, after exceeding the upper limit of the target for eight months last year. Brazil targets annual consumer price rises of 4.5 percent, plus or minus two percentage points.

Brazil is adopting a policy mix that has a dual goal of fueling economic growth at the same time as it brings inflation back to target, Tombini said in Senate testimony last week.

Tombini has trimmed benchmark borrowing costs by 200 basis points since August. Traders are anticipating the central bank will reduce the Selic rate by 50 basis points at this week’s monetary policy meeting tomorrow and March 7, futures yields show.

There will be a moderate cut in the Selic rate at the central bank meeting this week, Sao Paulo-based newspaper Valor Economico said today, citing Marco Aurelio Garcia, foreign policy advisor to Brazilian President Dilma Rousseff.

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

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

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