Real Posts a Third Weekly Decline as Brazil Avoids Intervention

Brazil’s real posted a third weekly decline as the central bank refrained from intervening to strengthen the currency and the dollar rallied on speculation the Federal Reserve will scale back stimulus measures.

The currency fell 0.4 percent to 2.0352 per dollar in Sao Paulo, the weakest closing level since Jan. 23. It dropped 0.7 percent this week. Swap rates on the contract due in January 2015 climbed five basis points, or 0.05 percentage point, to 8.52 percent. They have risen 17 basis points since May 10, the biggest weekly increase since April 12.

The real’s drop against the dollar mirrored that of all other major currencies on speculation the Fed will reduce bond purchases that have kept U.S. yields near record lows and buoyed emerging-market assets. In Brazil, policy makers have swung this year between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by reining in gains.

“There’s a general appreciation of the dollar in the external markets,” Jose Carlos Amado, a currency trader at Renascenca DTVM in Sao Paulo, said in a telephone interview. “If the central bank just sits there watching and does nothing, the real could slip.”

The currency has lost 1.7 percent this month after a trade deficit in April and growth concern in Europe and China fueled speculation that the flow of dollars into the Latin American nation will slow. Brazil reported on May 2 a trade gap of $994 million last month, compared with the $950 million forecast by economists surveyed by Bloomberg.

Tombini’s View

Swap rates rose for a fourth day on speculation central bank President Alexandre Tombini’s comment yesterday that policy makers will “do what’s needed” to contain inflation is a signal that policy makers will step up increases in borrowing costs at their May 28-29 meeting.

The central bank’s board raised the target lending rate last month by a quarter-percentage point to 7.50 percent to contain inflation after lowering borrowing costs by 5.25 percentage points in reductions that began in August 2011.

“The market continues to adjust to Tombini’s comments,” Newton Rosa, the chief economist at SulAmerica Investimentos in Sao Paulo, said in a phone interview. “The market is increasing bets on a 50 basis point hike.”

Annual inflation has remained above the 4.5 percent midpoint of policy makers’ target range of 2.5 percent to 6.5 percent since Tombini took office in January 2011.

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