Brazilian Real Falls as Global Tension Sinks Emerging-Market Bid

Brazil’s real dropped for the first time in three days as mounting tension from Iraq to Ukraine sank demand for higher-yielding assets in emerging markets.

The real declined 0.5 percent to 2.2350 per dollar in Sao Paulo, falling along with most developing-nation currencies tracked by Bloomberg. Swap rates on contracts maturing in January 2017 rose nine basis points, or 0.09 percentage point, to 11.51 percent.

“We see a scenario of risk aversion today,” Luis Otavio de Souza Leal, the chief economist at Banco ABC Brasil in Sao Paulo, said in a telephone interview.

Economists reduced their 2014 annual growth forecast for Brazil to 1.24 percent from 1.44 percent, according to the median of about 100 estimates in a central bank survey published today. Iraq’s sectarian violence showed no sign of abating, with Sunni Muslim militants and government forces clashing. In Ukraine, Russia cut natural gas supplies after demanding fuel payments be made in advance.

Brazil’s slowing growth spurred the central bank to hold its target lending rate at 11 percent on May 28 after nine consecutive increases to curb inflation.

Goldman Sachs Group Inc. said in a research report e-mailed to clients that it had cut its economic growth forecast for 2014 to 1.1 percent from 1.3 percent.

“Brazil’s economy continues to face significant headwinds,” senior economist Alberto Ramos wrote in the report. “As the macro and policy fundamentals remain weak, the real remains significantly overvalued and U.S. dollar yields are expected to go up.”

To support the currency and limit import price increases, Brazil sold today $198.5 million of foreign-exchange swaps and rolled over contracts worth $493.9 million. The central bank announced June 6 that it was extending its intervention, which was initially scheduled to end this month.

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