Brazil’s real tumbled to 2 per dollar for the first time in almost three years as Finance Minister Guido Mantega said the exchange rate doesn’t worry the government, encouraging bets the currency may fall further.
The currency extended the biggest loss against the dollar this year among the 16 most-traded counterparts tracked by Bloomberg after economists reduced their forecast for the target lending rate as Greece’s debt turmoil and China’s slowdown weighed on the prospects for global growth.
“The government is loving it,” Alfredo Barbutti, an economist at Liquidez DTVM Ltda., said by phone from Sao Paulo. “The government wanted this. It’s not a movement that escaped its control.”
The real slid 1.5 percent to 1.9962 per U.S. dollar in Sao Paulo after touching 2.0062, the weakest level since July 2009, when the world was trying to recover from the financial crisis. The currency has fallen 6.5 percent this year.
The yield on the Brazilian interest-rate futures contract due in January 2014 decreased nine basis points, or 0.09 percentage point, to 8.38 percent. The Bovespa index of stocks fell 3.2 percent to 57,539.61, its lowest closing level this year.
Brazil’s currency dropped as Mantega told reporters in Brasilia that the stronger dollar is good for the economy because it makes imports more expensive and exports cheaper.
“The government has never set parameters for the dollar and will not do so,” he said. “The dollar floats, and therefore will fluctuate according to the market.”
Brazil’s currency has been weaker than 1.90 since April 30 as central bank interventions to aid manufacturers and reductions in borrowing costs coincided with fiscal and political instability in Europe.
Policy makers will cut the Selic, as the target lending rate is known, to 8 percent by the end of 2012, down from the previous forecast of 8.5 percent, according to the median estimate in a May 11 central bank survey of about 100 economists published today.
“The worsening outlook abroad and weak economic activity in Brazil reinforce the trend for the Selic to fall,” Newton Rosa, the chief-economist at SulAmerica Investimentos, said by phone from Sao Paulo. “The drop in commodity prices helps control food prices a bit and neutralizes the impact of the currency on inflation.”
Lower Borrowing Costs
The central bank has reduced the target rate 3.5 percentage points since August, the most among the world’s 25 largest economies, according to data compiled by Bloomberg. Policy makers may reduce the benchmark to as low as 8 percent from 9 percent by the end of August, trading in interest-rate futures shows. The central bank bought $7.2 billion in the spot market in April, the most since $8.4 billion in March 2011.
Brazil’s bigger-than-expected 0.64 percent increase in prices last month won’t keep inflation from slowing toward its target, central bank President Alexandre Tombini told reporters in Rio de Janeiro last week.
“We are in a process in which inflation is converging” toward target, Tombini said. “Over the next three months, monthly inflation will be slower than in April.”
While annual inflation in Latin America’s biggest economy has slowed to a 19-month low of 5.10 percent, the rate has remained above the 4.5 percent midpoint of the country’s target since August 2010. Brazil seeks to keep inflation within a range of 2.5 percent to 6.5 percent.
Economists raised their forecast for 2012 inflation in Brazil to 5.22 percent, from 5.12 percent a week earlier, according to the central bank survey published today.
Brazil’s real declined today against the dollar along with most of its major and emerging-market counterparts as Greece’s struggle to form a government entered a second week and China’s stocks fell to a three-week low on concern a cut in banks’ reserve ratios won’t be enough to stem an economic slowdown.
Tombini also said last week that the real is weakening as part of a global trend that is strengthening the dollar against most currencies and that the floating exchange rate helps “protect the economy.”