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Brazil Real Drops on Central Bank Intervention; Swap Rates Rise

Sept. 17 (Bloomberg) -- Brazil’s real dropped the most since July after the central bank intervened to help exporters maintain competitive prices.

The real was the biggest loser among the dollar’s 16 most-traded counterparts tracked by Bloomberg after the central bank sold reverse currency swaps for the fourth time in four days. Finance Minister Guido Mantega reiterated in a newspaper interview that the government won’t let the real strengthen.

“The exchange rate still has the Mantega question,” Luciano Rostagno, the chief strategist at Banco West LB do Brasil, said in a phone interview from Sao Paulo.

The real depreciated 1 percent to 2.0320 per dollar at the close of trading in Sao Paulo, the biggest drop on a closing basis since July 3. Swap rates on contracts due in January 2013 increased two basis points, or 0.02 percentage point, to 7.31 percent.

Shorter-term swap rates rose after the central bank lowered reserve requirements for financial institutions, damping speculation further cuts in borrowing costs will be needed to sustain the economic recovery.

“The reserve-requirement reductions help to increase consumption and contribute to bets that the Selic has stopped falling,” said Rostagno, referring to the target lending rate.

Brazil’s central bank said Sept. 14 it cut reserve requirements to free up 30 billion reais ($14.8 billion) in credit as President Dilma Rousseff pushes financial institutions to reduce borrowing costs.

Growth Concern

The real also declined as China’s growth concern sapped demand for emerging-market assets. China’s stocks tumbled after Citigroup Inc. said the Asian country’s economic growth slowdown will extend into next year.

Brazil’s central bank said in a statement today that it sold 43,500 reverse currency swaps out of 70,000 offered today including 35,500 contracts due in November for $1.77 billion and 8,000 contracts due in December for $399 million. The real has fallen 8.1 percent this year, the most among the dollar’s major counterparts.

Brazil won’t allow the real to strengthen after the Federal Reserve announced last week a third round of asset purchases, Mantega said in an interview with the daily O Estado de S.Paulo on Sept. 16.

“We aren’t going to let the real appreciate,” Mantega told Estado. “The exchange rate will continue fluctuating, but we hope it fluctuates more in the opposite direction. In the past it fluctuated in one direction. Now, it will either be stable or will fluctuate in the other direction.”

Policy makers led by central bank President Alexandre Tombini have cut the target lending rate by five percentage points since August 2011 to a record low 7.5 percent.

The IGP-10 inflation index, which monitors Brazil’s wholesale, consumer and construction costs from Aug. 11 to Sept. 10, rose 1.05 percent, the Getulio Vargas Foundation reported. The median forecast of 27 economists in a Bloomberg survey was for a 1.02 percent increase.

To contact the reporters on this story: Josue Leonel in em São Paulo at jleonel@bloomberg.net; Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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