Brazilian Real Posts Monthly Decline on Measures

Brazil’s real dropped, extending its biggest monthly loss since September, as government measures to curb the currency’s appreciation and concern the global recovery will falter sapped demand for Brazilian assets.

The real fell 0.3 percent to 1.8268 per U.S. dollar today in Sao Paulo, bringing its decline in March to 6 percent, the worst performer among all global currencies.

The real weakened this month as the government expanded taxes and stepped up interventions in the foreign-exchange market to protect exporters from what President Dilma Rousseff called a “monetary tsunami” created by developed nations seeking to undervalue their currencies. Slowing growth in China and concern about Europe’s credit crisis also weighed on the real, said Ures Folchini, head of fixed income at Banco West LB do Brasil.

“There are signs that the measures are beginning to take effect, inflows are diminishing,” Folchini said by phone from Sao Paulo. “The fears about China and Europe are helping the government to execute its strategy of having a stronger dollar.”

Demand for reais waned this month after the government expanded a 6 percent so-called IOF tax on foreign loans and bonds by local companies and the central bank stepped up dollar purchases to weaken the currency.

The real has risen 27 percent since the end of 2008, the second-best performer among emerging-market currencies in that period after the Chilean peso.

Selic Rate

The central bank reduced the overnight lending rate 75 basis points, or 0.75 percentage point, on March 7 to 9.75 percent, more than the median 50-basis point forecast by a majority of economists surveyed by Bloomberg. The larger cut was a sign to analysts at Nomura Securities International Inc. and ICAP do Brasil CTVM that policy makers also were trying to stem inflows by reducing the attractiveness of Brazilian bonds.

Policy makers in the U.S., Europe and Japan are adopting an “expansionary policy” to shore up economic growth in a move that is causing a jump in capital inflows to emerging markets, Central Bank President Alexandre Tombini said in Senate testimony March 2.

Brazil’s real has consistently traded near the 1.80 level since March 19 as investors drop it in favor of other emerging-market currencies such as the Indian rupee and South African rand, said Ilan Solot, a London-based strategist at Brown Brothers Harriman.

“I think 1.80 is taken to be the new 1.70, and all signs at this stage are that investors are not willing to pick a fight with the central bank,” Solot said in a telephone interview. “There are other places to be long.”

Interest-Rate Futures

The yield on the Brazilian interest-rate futures contract due in January 2014 was little changed at 9.53 percent. It plunged 95 basis points this quarter as the central bank accelerated the pace of interest-rate cuts.

Policy makers have cut the benchmark rate, known as Selic, by 275 basis points since August to 9.75 percent. They see a “high probability” of interest rates declining to levels just above the record low 8.75 percent, according to minutes of their March 6-7 meeting, released March 15.

Yields tumbled this month as traders wagered the central bank will try to use other measures to tame inflation in order to keep interest rates low, Folchini said.

“The government’s goals are employment and growth,” Folchini said. “The government is going to do everything to not have to raise rates.”

Brazil’s central bank said March 29 it expects gross domestic product to expand 3.5 percent in 2012, following a 2.7 percent expansion last year and 7.5 percent in 2010.

-- With assistance from Blake Schmidt in Sao Paulo. Editors: Richard Richtmyer, Brendan Walsh

(Corrects first paragraph of story first published March 30 to show loss was the biggest since September.)
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