Brazil’s real fell to a three-year low after President Dilma Rousseff told Valor Economico that the currency is “overvalued,” spurring speculation that the government will allow it to depreciate further.
The currency slid 0.9 percent to 2.0985 per dollar at the close in Sao Paulo, the weakest level since May 2009. Swap rates on the contract due in January 2017 rose eight basis points, or 0.08 percentage point, to 8.81 percent.
Rousseff’s comments fueled speculation that the central bank will let the currency depreciate beyond 2.1 per dollar as European debt turmoil and U.S. budget wrangling spur demand for a refuge, said Alfredo Barbutti, an economist at Liquidez DTVM Ltda. in Sao Paulo.
“There is a desire in the government to weaken the real,” Barbutti said in a phone interview.
Brazil is seeking a currency that is not “overvalued” as the real is now, Rousseff said in an interview published yesterday in Valor Economico, a Sao Paulo-based newspaper. Rousseff’s press office confirmed the interview in an e-mailed response to questions from Bloomberg News.
Swap rates rose today as investors bet a weaker real will fuel inflation by making foreign products more expensive for Brazilian consumers, Barbutti said.
Rousseff wasn’t signaling further currency depreciation because she was referring to past levels of the exchange rate, Barclays Plc economists Guilherme Loureiro and Marcelo Salomon said today in an e-mailed research note to clients.
She was “defending a stronger hand in the markets to guarantee that the currency will continue trading at current levels but not jawboning the market to force a change in range,” the economists wrote. “How the Brazilian central bank acts in the days heading to the end of November will be critical to determine if our view is right.”
The central bank has sold reverse currency swaps since August to keep the real weaker than 2 per dollar to support exporters. It sold $1.4 billion of contracts Oct. 25, $1.6 billion Oct. 23, $1.3 billion Oct. 5, $5.7 billion Sept. 12 through Sept. 17 and $350 million Aug. 21.
Finance Minister Guido Mantega levied a 6 percent tax on local debt to curb the real’s appreciation in 2010, when he used the term “currency war” to describe the use of monetary policy by industrialized countries to boost exports.
Brazil will keep doing whatever is necessary to stop “selfish” monetary policies of some developed nations from hurting its economy by driving up the real, Mantega said at an International Monetary Fund meeting in Tokyo last month.
The real fell today along with most emerging-market currencies after European finance ministers failed to agree on a debt reduction package for Greece, bolstering demand for a refuge in the dollar.
The central bank stepped in to curb the real’s losses by auctioning currency swaps in May and June as European sovereign-debt turmoil drove it to what was then a three-year low. A strong U.S. currency hurts Brazilian companies whose expenses are mostly in dollars.
“The market conditions today would justify the central bank doing a currency swap,” Barbutti said.
Brazil’s policy makers have reduced the target lending rate by 5.25 percentage points to a record low 7.25 percent since August 2011 as the government reduced taxes and stepped up public spending to revive an economy that is projected to expand 1.5 percent this year, less than the U.S., India and China.
Central bank President Alexandre Tombini reaffirmed on Nov. 7 plans to keep rates low for a “prolonged time” to balance faster growth with slower inflation.