Brazil Real Declines as Fed Dudley Offsets Better Forecasts

  • Local media report government will increase growth forecast
  • NY Fed president said interest rates could rise next month

The real declined after warnings from a Federal Reserve member that investors are underestimating the likelihood of increases in borrowing costs.

The currency slid 0.5 percent to 3.2022 per dollar on Tuesday in Sao Paulo after earlier rising as much as 1 percent. The currency’s advance lost steam after William Dudley, the New York Fed President, said the central bank could potentially raise interest rates as soon as next month. Bloomberg’s dollar index fell 0.8 percent to the lowest since June.

Currency traders drove up the value of the real earlier after newspapers Valor Economico and Estado de S. Paulo reported Tuesday that Brazil’s government will increase its growth forecast for next year to 1.6 percent from 1.2 percent as some economic indicators point to a recovery. The higher GDP estimate will mean the government doesn’t need to raise taxes to meet its fiscal target, both papers said. Credit Suisse on Monday also raised its estimate for next year to 0.8 percent, and said the economy may contract 3 percent this year, less than it had previously expected.

"Dudley’s comments were responsible for partially shadowing the real gains" said Italo Abucater, the head of currency trading at ICAP Brasil Ctvm in Sao Paulo. Improved economic forecasts fueled the real earlier, said him.

The real has surged 24 percent in 2016, the world’s best performance, amid optimism that Acting President Michel Temer can restore confidence in the ailing economy.

Suspended President Dilma Rousseff said in a speech on Tuesday the Senate should end efforts to impeach her. Investors said her comments don’t change the broad expectation that the impeachment will be approved.

"The impeachment proceedings’ result is already set, there is not much Rousseff can do now," said Reginaldo Galhardo a foreign-exchange manager at Treviso Corretora de Cambio in Sao Paulo.

Brazilian swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.05 percentage point to 12.7 percent.

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