Brazilian Currency Touches Four-Year Low, Prompting Intervention

Brazil’s real touched a four-year low, prompting the central bank to intervene for a second straight day as a report showed higher-than-forecast inflation.

Central bank President Alexandre Tombini said policy makers are working to reduce the inflationary pressure that may stem from the currency’s decline. Wholesale, construction and consumer prices rose 0.74 percent in the 20 days starting May 21, the Getulio Vargas Foundation reported. The median forecast of 13 analysts surveyed by Bloomberg was for a 0.65 percent increase in the IGP-M index.

The real depreciated 0.5 percent to 2.1815 per U.S. dollar at close in Sao Paulo. It earlier dropped 0.7 percent to 2.1856, the weakest intraday level since May 2009. Swap rates on the contract due in January 2015 surged 37 basis points, or 0.37 percentage point, to 10.19 percent, the highest level on a closing basis since March 2012.

“If there’s more currency devaluation, there will be more inflation,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview. “On top of that, the IGP-M shows that wholesale prices are under pressure again.”

Brazil is prepared to face the “adverse winds” of a stronger dollar and has the capacity to make the currency market function adequately, Tombini told the Senate’s Economic Affairs Committee in Brasilia today.

Real’s Decline

The real has tumbled 6.7 percent in the past month, the worst performance among 16 major dollar counterparts, on speculation that the Federal Reserve will curtail a stimulus program that has buoyed emerging-market assets.

To boost liquidity, the Treasury offered in its second unscheduled auction since 2008 to buy back as many as 2 million fixed-rate NTN-F and LTN government bonds, five days after it bought back 200,000 NTN-Fs.

The real swung between gains and losses today after the central bank sold $4.5 billion in foreign-exchange swap contracts in two auctions today, the sixth day of interventions in three weeks.

The currency rallied on June 13 after the government removed a 1 percent tax charged on wagers against the dollar, the second step taken this month to loosen capital controls. A week earlier, it eliminated a tax on foreign investors who buy Brazilian bonds in the domestic market.

The central bank raised its target lending rate by 50 basis points on May 29 to 8 percent to curb inflation, surprising 38 of 57 economists surveyed by Bloomberg, who had expected a second straight increase of 25 basis points. The benchmark was held at a record low 7.25 percent from October to March to support growth.

Quickening Inflation

The annual pace of consumer price increases accelerated for nine straight months through March to 6.59 percent, exceeding the upper end of the monetary authority’s target range of 2.50 percent to 6.50 percent. The inflation rate eased to 6.49 percent in April and was 6.50 percent in May.

Brazil’s currency has fallen more than 5 percent since Fed Chairman Ben S. Bernanke said on May 22 that the central bank may taper its stimulus program if the outlook for employment shows “sustainable improvement.” U.S. policy makers begin a two-day meeting today.

President Dilma Rousseff, whose government’s approval rating dropped in June for the first time since she took office, pledged during an event in Brasilia today to listen to demonstrators who staged the largest street protests in more than two decades.

More than 200,000 people, most of them students, demonstrated in 12 cities throughout Brazil yesterday, venting discontent over a range of issues from inflation and corruption to poor hospitals and schools.

Brazil’s gross domestic product expanded 0.9 percent last year, down from 2.7 percent in 2011 and 7.5 percent in 2010. Economists in the latest central bank survey forecast expansion of 2.49 percent this year.

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