Real Rises on Bets Brazil Will Allow Gain After U.S. Budget Deal

Brazil’s real gained for the first time in three days on speculation policy makers will allow the currency to strengthen after U.S. lawmakers passed a bill to avoid scheduled tax increases.

The real advanced along with most of the dollar’s 16 major counterparts after the U.S. House passed a bill undoing higher income taxes for more than 99 percent of households, boosting the prospects for the world’s largest economy and buoying emerging-market assets. Traders speculated that the real will extend its gains as a Brazilian central bank official said last month that a weaker exchange rate has contributed to inflation.

“The agreement in the U.S. to avoid the fiscal cliff is the big event in the market now,” Reginaldo Galhardo, the head of foreign-exchange trading at Treviso Corretora in Sao Paulo, said in a phone interview. “On top of that, Brazil is using the currency to control inflation, so the market may begin to test the 2 level again.”

The real appreciated 0.3 percent to 2.0457 per dollar. Swap rates on the contract due in January 2015 rose two basis points, or 0.02 percentage point, to 7.73 percent.

The currency advanced Dec. 20 after Carlos Hamilton, the central bank’s director for economic policy, said policy makers consider an exchange rate of 2.05 per dollar as more “adequate” when creating economic forecasts than 2.10. The central bank isn’t comfortable with 5 percent annual inflation, Hamilton said.

Inflation Report

Brazil’s annual rate of consumer price increases as measured by the benchmark IPCA index has exceeded the 4.5 percent midpoint of the central bank’s target range for 27 consecutive months. Inflation unexpectedly accelerated to 5.53 percent in November from 5.45 percent the month before, the statistics agency reported Dec. 7.

Swap rates rose today on speculation the U.S. budget deal will boost global growth and cause Brazil’s inflation to accelerate, limiting the central bank’s ability to cut borrowing costs further.

“This reduces the risk of a global slowdown that could have lowered prices in the international market and opened up space for more rate cuts,” Flavio Serrano, a senior economist at Espirito Santo Investment Bank in Sao Paulo, said by phone.

U.S. budget optimism overshadowed a report showing consumer prices in Brazil’s seven biggest cities as measured by the IPC-S index rose 0.66 percent in the 30 days through Dec. 31, less than the 0.71 percent median forecast of 13 economists surveyed by Bloomberg.

Target Rate

Policy makers left the target lending rate at a record low 7.25 percent in November following 10 straight reductions to support Latin America’s largest economy.

The real lost 9 percent against the dollar in 2012, the worst performance among 25 emerging-market currencies tracked by Bloomberg after Argentina’s peso.

The central bank has swung between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per dollar.

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