Brazil Real Touches Month Low, Prompting Currency Swap Auction

Brazil’s real touched a one-month low on concern Europe’s sovereign-debt turmoil is derailing global growth, prompting the central bank to announce a second day of currency swaps.

The currency declined as German Chancellor Angela Merkel ruled out joint euro-area bonds as a means of lowering Spain’s borrowing costs before this week’s regional summit. Brazil reduced its development bank’s long-term interest rate to a record low and stepped up government purchases of buses and tractors to revive growth.

“There are expectations for the meeting in Europe this week, but the market thinks nothing will come out of it,” Hideaki Iha, a currency trader at Fair Corretora de Cambio e Valores in Sao Paulo, said in a telephone interview.

The real was little changed at 2.0754 per U.S. dollar after dropping 1 percent to 2.0963, the weakest level since May 23. The currency has fallen 12 percent this quarter, the worst performance among the 25 emerging-market currencies tracked by Bloomberg.

The real pared its losses after the central bank said in a statement it will offer as many as 60,000 currency swap contracts at an auction tomorrow from 10:15 a.m. to 10:30 a.m. local time. The bank sold 60,000 contracts today in a rollover of swaps that were set to expire July 2, according to the bank’s website.

The yield on the Brazilian interest-rate futures contract due in January 2014 was unchanged at 7.94 percent after touching a record low 7.88 percent yesterday.

BNDES Easing

The long-term reference rate for loans from the BNDES state development bank will be cut to a record low 5.5 percent from 6 percent, Finance Minister Guido Mantega said today. The government will also increase purchases of trucks, buses, ambulances, defense equipment and tractors by 6.6 billion reais ($3.2 billion) in the second half of the year, he said.

The moves follow a 65 billion real ($31.1 billion) stimulus package announced in April that included tax cuts and more subsidized credit.

The country’s exchange rate and borrowing costs will remain low, helping to boost economic growth, according to Mantega.

“Both the interest-rate cuts and the weak exchange rate are going to continue, spurring an important structural change in the economy” Mantega said. “This process hasn’t ended. It’s only beginning and will continue over the coming months.”

Central Bank Cuts

Central bank President Alexandre Tombini has reduced the target lending rate by 4 percentage points to a record low 8.5 percent since August to shield the economy from the European debt crisis. Traders expect the benchmark to fall to at least 7.75 percent this year, according to interest-rate futures.

The government’s purchases of vehicles are unlikely to boost Brazil’s industrial production significantly, according to Vladimir Caramaschi, chief economist of Credit Agricole SA’s Brazilian unit in Sao Paulo.

“In the short term, the effects may be disappointing,” Caramaschi said in a telephone interview. “The climate abroad doesn’t help at all, with all the uncertainty. The demand for investments continues to be weak.”

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