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Brazilian Real Weakens as Fed Comments Dim Outlook for Inflows

March 14 (Bloomberg) -- Brazil’s real weakened after Federal Reserve policy makers raised their outlook for U.S. growth, quelling speculation they will begin a third round of bond buying that would further depreciate the dollar.

The real declined 0.7 percent to 1.8044 per U.S. dollar, from 1.7922 yesterday. The yield on the Brazilian interest-rate futures contract due in January 2013 dropped three basis points, or 0.03 percentage point, to 8.67 percent.

Brazil’s real weakened with most other emerging-market currencies after the Federal Open Market Committee said yesterday it expects “moderate economic growth” and predicted the U.S. unemployment rate “will decline gradually.” The comments reduced speculation the central bank will resume buying bonds to stimulate the world’s largest economy, which would increase the dollar supply and fuel demand for higher-yielding assets.

“The Fed improved the scenario for the U.S. and for the global economy,” said Flavia Cattan-Naslausky, a currency strategist with RBS Securities Inc. in Stamford, Connecticut. “With a stronger dollar in the world, this could reduce the appreciation of risk assets like commodities and riskier currencies.”

Gross domestic product in the U.S. will climb at a 2.5 percent annual rate in the final three months of the year, up from 2 percent this quarter, according to the median forecast of 71 economists surveyed from March 9 to March 13. For all of 2012, the U.S. may expand 2.2 percent, accelerating from 1.7 percent growth last year.

Brazilian Rate Futures

The Federal Reserve kept its benchmark interest rate target in a range of zero to 0.25 percent, where it’s been since December 2008.

Yields on Brazilian interest-rate futures contracts maturing in July 2013 or sooner fell after Finance Minister Guido Mantega said yesterday in Senate testimony that the benchmark rate will converge toward the country’s long-term interest rate, which is used by the national development bank to provide subsidized loans to companies. The so-called TJLP is currently at a record low 6 percent.

Mantega’s comments bolstered speculation the central bank will aggressively cut borrowing costs in coming months, according to Ram Bala Chandran, a Latin America currency and rates strategist at Citigroup Inc. in New York.

Central bankers led by President Alexandre Tombini stepped up the pace of interest-rate cuts to 75 basis points on March 7, reducing the benchmark overnight rate to 9.75 percent, to help spur growth and diminish the allure of the country’s fixed-income assets. Policy makers have lowered the rate 275 basis points since August.

Interest-Rate Outlook

Longer-term yields rose as signs the global economy is recovering boosted wagers that inflation may limit the length of the interest-rate cutting cycle, Cattan-Naslausky said.

“Just like the Fed has done, at some moment Brazil’s Copom will have to recognize the better environment,” she said. “This would give a better signal about the end of this cycle of monetary easing.”

Traders are anticipating Tombini will reduce the Selic rate by 50 basis points in April and to as low as 8.5 percent by July, according to rate futures yields.

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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