Brazil Real Leads Global Currency Declines Amid Fiscal Concern

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Brazil’s real led global currency losses as fiscal concern overshadowed speculation that the central bank will increase borrowing costs by another half-percentage point later Wednesday.

The real fell 0.8 percent to 2.9613 per dollar in Sao Paulo, the biggest drop among 31 major currencies tracked by Bloomberg. It was still headed for an 8 percent rally in April, the first monthly gain since August.

The central government’s smaller-than-forecast primary surplus in March revived doubts on the ability of President Dilma Rousseff to shore up accounts and avoid a junk credit rating. At the same time, some investors regarded an expected fifth straight increase in Brazil’s borrowing costs as a reason to buy the real.

“Investors are skeptical about fiscal prospects,” Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo, said in a telephone interview. “Still, volatility is the word.”

The central government posted a March primary surplus of 1.5 billion reais ($511 million), smaller than the forecast from economists surveyed by Bloomberg although better than the prior deficit. The fiscal measure excludes interest payments as well as states, municipalities and government-run companies.

Finance Minister Joaquim Levy told lawmakers at a hearing Wednesday that Brazil needs fiscal equilibrium to grow and avoid a credit rating downgrade.

Credit Rating

Brazil’s investment-grade status was affirmed in March with a stable outlook by Standard & Poor’s, which last year gave the country its first sovereign downgrade in more than a decade.

Swap rates, a gauge of expectations for Brazil’s borrowing costs, declined 0.07 percentage point to 13.22 percent on the contract maturing in January 2017. They increased 0.25 percentage point last week.

The central bank raised borrowing costs to 12.75 percent at its March meeting as inflation accelerated. An increase of another half-percentage point Wednesday would match the three previous moves to boost interest rates.

Buying the real with borrowed dollars in so-called carry trades has returned 9.6 percent this month, the most among the 31 major currencies after the Russian ruble and Colombian Peso. In such trades, investors get funds in countries where borrowing costs are low, including the U.S., and buy assets where yields are higher.

The central bank extended the maturity of currency swap contracts worth $510.8 million. Brazil halted in March the sale the swaps supporting the real and limiting import price increases.

In the U.S., Federal Reserve policy makers said that they expect to raise rates this year for the first time since 2006 as the economy nears full employment and that their decision will be guided by the latest data.

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