Brazil Real Drops to 12-Year Low as Rout Seen Gaining Momentum

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The real slid to a 12-year low after the rout gained momentum on concern Brazil will lose its investment grade rating and amid evidence of a widening political corruption scandal.

“While a lot of the bad news is already priced in, there is much more to go,” Christian Lawrence, a foreign-exchange strategist at Rabobank Nederland, said in a phone interview from New York.

The real fell for a fourth straight day, declining 0.6 percent to 3.4684 per dollar on Tuesday, the weakest level since March 2003. The average directional index, a gauge of momentum, increased to 36.06, above the level of 25 that some traders interpret as a sign that a trend will last.

The corruption issue took on fresh urgency for currency traders when police detained Jose Dirceu, former President Luiz Inacio Lula da Silva’s ex-chief of staff. His arrest came after federal prosecutors said last month they were investigating claims of influence peddling by Lula, who ushered in an era of optimism that captivated global investors and propelled Dilma Rousseff to high office.

Brazil’s failure to meet fiscal goals, a contracting economy and Rousseff’s sinking popularity have pushed the real down 24 percent this year, the worst performance in the world.

S&P Rating

The currency tumbled 9 percent last month as Standard & Poor’s said that it may lower Brazil’s credit rating to junk and the central bank limited the allure of the currency when it signaled that it would avoid raising interest rates further.

S&P rates the nation at BBB-, the lowest level of investment grade. Moody’s Investors Service, whose ranking for Brazil is one step higher, put the nation on negative outlook in September.

Swap rates, a gauge of expectations for changes in borrowing costs, climbed 0.04 percentage point to 13.15 percent Tuesday on the contract maturing in January 2018.

While the central bank increased the target lending rate last week to an eight-year high of 14.25 percent, policy makers changed the language in their statement to say that holding the interest rate “for a sufficiently prolonged period” is necessary to slow inflation toward the official target at the end of 2016.

The latest economic news wasn’t as bad as expected. Industrial production fell 0.3 percent in June from the previous month, better than the median forecast of economists surveyed by Bloomberg, which called for a decline of 0.7 percent.

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