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Brazil’s Real Erases 2012 Gains on Central Bank Intervention

Brazil’s real tumbled, erasing its gains for the year, after the central bank intervened to buy dollars for a third straight day and European debt concerns sapped demand for higher-yielding, emerging-market assets.

The real slid 0.9 percent to 1.8786 per U.S. dollar after earlier touching 1.8839, the weakest level since Dec. 29. The central bank purchased dollars in two separate auctions at 1.8703 reais and 1.8800 reais each.

The real was the worst performer among emerging-market currencies today as the central bank’s dollar purchases spurred speculation the government wants to keep it weaker than 1.8-per-dollar to buoy exports and help boost economic growth to 4.5 percent this year from 2.7 percent in 2011. Traders are anticipating policy makers will reduce the benchmark rate by 75 basis points to 9 percent at today’s policy meeting, further reducing the attractiveness of Brazilian assets.

“It was a huge move today and it might not be over,” Flavia Cattan-Naslausky, a local markets strategist at RBS Securities Inc., said by phone from Stamford, Connecticut. “The intervention activity over the last week strongly suggests that the line is outright higher” than 1.80.

The real has lost 0.6 percent this year, the second-worst performance among 16 major currencies tracked by Bloomberg after the Japanese yen. The currency has traded weaker than 1.80 since mid-March, when the government expanded financial taxes to discourage capital inflows and protect exporters.

Dollar’s Rally

“The principal factor in the dollar’s rally is the central bank auctions and the second one is the expectation of rate cuts,” Deives Ribeiro, head of currency trading at Fair Corretora e Cambio and Valores, said by phone from Sao Paulo. “On top of the central bank’s pushing up the dollar, it’s strengthening in the global markets.”

The real also declined amid concern about the sovereign debt crisis in Europe and as disappointing earnings in the U.S. damped investors’ appetite for higher-yielding assets, Ribeiro said.

Dollar loan rates in Brazil soared to a two-month high today as the central bank’s interventions and measures to curb inflows reduced the supply of the U.S. currency in the country.

Contracts due in March, known as cupom cambial, a measure of borrowing in dollars in Brazil, reached 1.95 percent, the highest level since February 8.

Yields on most Brazilian interest-rate futures contracts fell as investors speculated policy makers may keep cutting the benchmark rate after today’s monetary policy decision.

Yields on the futures contract due in January 2014 were unchanged at 9.1 percent after earlier falling as much as six basis points.

Rate Cuts

Policy makers have lowered the benchmark by 275 basis points since August to 9.75 percent. In the minutes of its March 6-7 meeting, the central bank said there’s “high probability” that the rate will fall to just above its record low 8.75 percent and stay there.

“A 75-basis-point cut today is practically a given,” Italo Lombardi, Latin America economist at Standard Chartered Bank, said in a telephone interview from New York. “If there’s deterioration in the situation in Europe, the central bank may re-evaluate the scenario.”

Speculation that central bank President Alexandre Tombini may extend rate cuts grew after Latin America’s biggest economy contracted for a second straight month in February and inflation slowed.

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