Brazil Real Tumbles Most in World as Mantega Says Drop Helpful

Brazil’s real tumbled the most in 15 months after Finance Minister Guido Mantega said a weaker currency was good for local industry, deepening a selloff sparked by concern the U.S. will curb monetary stimulus.

The real depreciated 2.2 percent to 2.3925 per dollar at the close of trading in Sao Paulo, the worst performance among all currencies tracked by Bloomberg. The real lost 5 percent this week. Swap rates on the contract due in January 2015 rose 27 basis points, or 0.27 percentage point, to 10.33 percent.

Brazil’s currency has lost 15 percent in the past three months, boosting the cost of imports and adding to inflation that already exceeds central bank targets. The exchange rate is at a level that’s good for local industry, Mantega told reporters in Sao Paulo today. The currency will be volatile until U.S. policy makers clarify their plans for paring back an $85 billion a month bond-buying program, he said.

“If he says it’s at a good level, that means the price of the dollar will only rise,” Jose Carlos Amado, a currency trader at Renascenca Corretora, said by phone from Sao Paulo. “No one knows the parameters for the real’s value after the Fed reduces stimulus.”

The real’s decline to a 4 1/2-year low prompted the central bank to announce yesterday that it will roll over more than $5 billion in currency swap contracts designed to limit losses.

The rollover of 100,800 contracts due Sept. 2 began today. Policy makers will continue to intervene in the currency futures market, the bank said.

Currency Contracts

The central bank auctioned 20,000 currency swap contracts worth $989 million today then sold an additional $1.08 billion worth of contracts in a separate auction. It plans to offer 20,000 more contracts on Aug. 19, according to a statement today after markets closed.

The central bank’s efforts have been overwhelmed by concern that Brazil’s economy is slumping and speculation that Federal Reserve Chairman Ben S. Bernanke will pare stimulus in the U.S. later this year as signs mount that unemployment is easing in the world’s largest economy.

Economic activity, a proxy for gross domestic product in Latin America’s largest economy, rose 2.35 percent in June from a year earlier, according to a central bank report yesterday, trailing the median forecast of economists surveyed by Bloomberg for a gain of 2.70 percent. Gross domestic product will expand 2.21 percent this year, down from the previous week’s estimates of 2.24 percent, according to an Aug. 9 central bank survey of about 100 analysts.

“Rates are rising abroad and we have incoherent actions in Brazil’s economic policy,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimentos, said by phone from Sao Paulo. “Brazil is suffering more than other countries.”

Global Selloff

The JPMorgan Emerging Markets Currency Index has dropped 6.6 percent from a three-month high reached on May 9 on mounting bets that the Fed will pare stimulus. The real has lost 16 percent in that span, the worst performance in the world behind the Syrian pound and Iranian rial.

Brazil’s benchmark stock index, the Ibovespa, has tumbled 15 percent this year, the worst performance among the world’s biggest emerging-market countries.

Currency losses are challenging policy makers’ goal of keeping annual inflation below the 6.5 percent upper limit of a target range while seeking to bolster economic growth. Bus fare increases sparked the South American nation’s biggest protests in two decades in June, prompting President Dilma Rousseff to step up efforts to counter the real’s depreciation.

Brazil’s annual inflation rate fell to 6.27 percent in July, above the 6.24 percent estimate of analysts surveyed by Bloomberg and down from 6.7 percent the prior month, official data showed Aug. 7. The central bank targets a rate of 4.5 percent, plus or minus 2 percentage points.

Swap Rates

Swap rates on the January 2015 contract have surged 73 basis points this week, the biggest weekly increase since June 21, as the real’s drop fueled inflation concern and the prospect of reduced stimulus drove up rates globally.

The real should depreciate to 2.4 per dollar in six months and 2.45 in the next 12 months, Barclays Plc economists Guilherme Loureiro and Marcelo Salomon wrote in a report today.

“We have been concerned that the deterioration of Brazilian fundamentals, which in our base case scenario will lead to a sovereign credit downgrade in the first quarter of 2014, would pressure the real as we moved through the second half of 2013,” the economists wrote. “The selloff came faster than we expected.”

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