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Brazil Said to Probably Not Roll Over Maturing Currency Swap

Brazil’s central bank doesn’t plan to roll over $4.5 billion in currency swaps that mature on Aug. 1, a government official said, a move that may further weaken the world’s worst-performing major currency this year.

The level of stress in financial markets has eased in recent days, allowing the government to settle swap positions next week, said the official, who asked not to be identified because the discussions are not public.

Brazil’s central bank this year had been auctioning swaps, the equivalent to selling dollars in the futures market, as spillover from Europe’s debt crisis caused the real to weaken faster than policy makers wished. The real is the worst performing currency this year among the 16 most-traded, falling 7.8 percent against the U.S. dollar.

The real pared earlier gains and was little changed at 2.0232 per U.S. dollar at 3:11 p.m. local time. The currency has strengthened the past two days amid speculation Euro area policy makers may take steps to ease the region’s debt crisis.

The central bank’s decision to refrain from renewing the contracts would be tantamount to removing $4.5 billion from the foreign exchange market, Alfredo Barbutti, an economist at Liquidez Dtvm Ltda., said in a phone interview from Sao Paulo.

“If it’s true the central bank won’t roll over the swaps, the currency will weaken quite a bit,” Diego Donadio, a strategist at Banco BNP Paribas Brasil SA, said in a telephone interview from Sao Paulo. “It could move towards 2.10” per dollar on the day the swaps mature, he said.

Brazil’s government is counting on a weaker real, along with tax breaks and record low interest rates, to revive economic growth this year. Gross domestic product expanded an annualized 0.8 percent in the first quarter, half the pace of the U.S.

Finance Minister Guido Mantega said on July 4 that the government would continue to take measures to maintain a weaker real in a bid to support the domestic industry.

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