Brazil Real Trades at One-Week Low as Fed Concern Sinks Demand

Brazil’s real traded at a one-week low as higher-than-forecast U.S. retail sales growth added to speculation that the Federal Reserve will curtail a stimulus program that has buoyed emerging-market assets.

The real was little changed at 2.3422 per U.S. dollar at 3:42 p.m. in Sao Paulo, the weakest level on a closing basis since Dec. 5. Swap rates on contracts maturing in July 2014 dropped two basis points, or 0.02 percentage point, to 10.20 percent as Brazil’s retail sales growth missed forecasts, adding to speculation that the world’s biggest borrowing-cost increases are approaching an end.

The currency has fallen 5.4 percent in the fourth quarter on concern fiscal deterioration will lead to a reduced credit rating and amid speculation the Fed will reduce monthly asset purchases that have kept U.S. yields low. Brazil’s central bank President Alexandre Tombini reiterated this week that the $60 billion intervention program to support the real and limit increases in import prices will be extended into 2014.

“The real is reacting to the news from the U.S.,” Hideaki Iha, a currency trader at Fair Corretora in Sao Paulo, said in a telephone interview. “Retail sales were strong” and strengthened the dollar against major currencies.

The central bank sold $497 million in currency swaps today as part of the intervention program and also auctioned $988 million to extend contracts due in January.

Swap rates declined after the national statistics agency reported today that retail sales climbed 5.3 percent in October from a year earlier, less than the 5.8 percent median forecast of 34 economists surveyed by Bloomberg.

To limit inflation, policy makers have raised the target lending rate by 2.75 percentage points since April to 10 percent, the most among 49 central banks tracked by Bloomberg.

Currency Swaps

Senate justice and economic committees approved a proposal yesterday to reduce interest rates on state and city debt, according to the Senate news agency. The bill will have a vote on the Senate floor in February.

Finance Minister Guido Mantega said yesterday that the government prefers the bill be voted on next year to avoid leaving “any doubts that we are pursuing a larger primary” surplus. He said that tax collection climbed to a 10-month high of 110 billion reais in November and the government is “correcting” the fiscal situation.

Brazil’s Deficit

Brazil posted a government budget deficit equal to 3.4 percent of gross domestic product in October, the widest since 2009. The primary surplus was 1.4 percent of economic output in the year through October. Standard & Poor’s and Moody’s Investors Service cited Brazil’s fiscal situation when they lowered their outlooks this year on the nation’s credit rating, which both companies have at two levels above junk.

The rating depends on whether the government can achieve a primary surplus close to 1.8 percent of GDP and its fiscal strategy, Sebastian Briozzo, director of S&P’s sovereign ratings group, said at an online conference sponsored by the ratings company Dec. 10.

In the U.S., retail sales climbed 0.7 percent last month, the most since June, after a 0.6 percent advance in October that was larger than previously reported, the Commerce Department reported today. The median forecast of 83 economists surveyed by Bloomberg called for a 0.6 percent advance.

The Fed may consider reducing its $85 billion of monthly bond purchases at its Dec. 17-18 meeting, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, compared with 17 percent in a Nov. 8 poll.

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