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Brazil Real Drops as Concern Fed Will Pare Stimulus Damps Demand

The real fell to a two-month low as concern the U.S. Federal Reserve will curtail monetary stimulus and Brazil’s budget deficit will lead to a reduction in the nation’s credit rating damped demand for the currency.

The real dropped 0.8 percent to 2.3061 per U.S. dollar at the close in Sao Paulo, the weakest since Sept. 6. It extended its decline in the past month to 4.4 percent, the biggest among 16 major currencies tracked by Bloomberg. Swap rates on contracts maturing in January 2016 climbed 15 basis points, or 0.15 percentage point, to a two-year high of 11.74 percent.

The currency erased its gain after a U.S. report showed better-than-forecast growth in the third quarter, adding to concern that the Fed will reduce bond purchases intended to stimulate the economy. Swap rates rose on speculation a weaker real will fuel inflation and prompt Brazil’s policy makers to increase the target lending rate to 10 percent this month.

“The market is favoring this idea that the Fed is going to reduce stimulus earlier than expected,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil SA in Sao Paulo, said in a telephone interview.

The U.S. economy grew at a 2.8 percent annualized rate in the third quarter, the Commerce Department reported today. That expansion surpassed the 2 percent median forecast of economists surveyed by Bloomberg.

In Brazil, Finance Minister Guido Mantega told reporters yesterday that the government has full control over the budget and the deterioration in fiscal accounts is temporary. A report showed last week the deficit swelled in September to the equivalent of 3.3 percent of gross domestic product, the biggest since 2009.

Budget Outlook

Treasury Secretary Arno Augustin said today in an interview at his Brasilia office that the government will post for October a primary budget surplus, which excludes interest payments, and will meet its full-year goal of 73 billion reais.

Standard & Poor’s and Moody’s Investors Service lowered their outlooks this year on Brazil’s credit rating, which both companies put at two levels above junk.

“What the market is concerned about is the weakness of the real and the lack of credibility on fiscal policy,” Pedro Tuesta, a Latin America economist at 4cast Ltd., said in a telephone interview from Washington.

The central bank sold $496.6 million of foreign-exchange swaps as part of a $60 billion intervention program that has pushed the currency up 5.6 percent since it was announced Aug. 22 to help curb import price increases. Brazil extended the maturities on only about $6 billion of the $8.9 billion of swaps that matured Nov. 1.

Slower Inflation

Consumer prices climbed 5.84 percent in the 12 months through October, less than the median forecast of analysts surveyed by Bloomberg, which called for inflation to accelerate to 5.87 percent. The annual rate, while declining, remained more than a percentage point above the 4.5 percent target.

“The October data is in line with the tendency of a slowing of inflation,” Joao Costa, the chief economist at Pezco Microanalysis in Sao Paulo, said in a telephone interview. “But it’s still a long way from the target.”

The central bank has raised the target lending rate to 9.50 percent from a record low 7.25 percent this year, the most among 49 nations tracked by Bloomberg, to cool consumer demand and hold down prices.

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