Brazil’s Currency Drops to Nine-Year Low on Fed Policy Concern

Brazil’s real fell to a nine-year low on concern the Federal Reserve will begin raising interest rates sooner than expected as the U.S. economy recovers, making emerging-market assets less attractive.

The real declined 1.4 percent to 2.6523 per dollar at the close of trade in Sao Paulo, the weakest closing level since April 2005.

Most developing-nation currencies dropped as reports before next week’s Fed meeting showed that the number of Americans filing for unemployment benefits fell to a three-week low while U.S. retail sales rose the most in eight months. One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, is the highest among 31 major currencies tracked by Bloomberg after the Russian ruble and Colombian peso.

“The real is tracking the decline of currencies abroad, with signals of a recovery in America’s economy boosting the return of dollars to the U.S.,” Joao Paulo de Gracia Correa, a currency trader at Correparti Corretora de Cambio in Curitiba, Brazil, said in a telephone interview.

The real fell yesterday on concern the central bank will curtail swap offerings supporting the tender. Brazil sold the equivalent of $197.9 million of swaps today and rolled over contracts worth $489.8 million.

Central bank President Alexandre Tombini said two days ago that policy makers have two weeks to evaluate the intervention program, which he said has fully achieved its goals.

Borrowing Costs

Swap rates, a gauge of expectations for changes in borrowing costs, climbed 0.02 percentage point to 12.51 percent on the contract maturing in January 2016.

The central bank said in minutes published today that it will carry out additional increases in borrowing costs with restraint to curb inflation as fiscal policy becomes tighter. It raised the benchmark lending rate on Dec. 3 by a half-percentage point to 11.75 percent.

“The minutes had a dovish tone and are signaling that hikes in the benchmark rate might be coming close to an end,” Newton Rosa, the chief economist at SulAmerica Investimentos in Sao Paulo, said in a telephone interview.

Policy makers will do what’s needed to achieve a more benign inflationary outlook, Tombini said today at an event in Sao Paulo. He didn’t mention currency intervention plans.

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