Brazil’s Real Drops as Central Bank Halves Intervention Program

Brazil’s real declined the most among major Latin American tenders after the central bank cut in half daily swap offerings supporting the currency.

The real fell 1.4 percent to 2.6942 per dollar at the close of trade in Sao Paulo, the biggest drop among regional currencies tracked by Bloomberg. The currency has lost 0.9 since Dec. 26, its sixth straight weekly decline in the worst stretch of losses since August.

The central bank said in a statement on its website Dec. 30 that it will offer as much as $100 million a day in currency swaps until at least March 31, compared with $200 million a day last year. The intervention program began in 2013 to support the real and limit import price increases.

“By cutting the amount offered, the central bank demonstrated it has the intention of reducing the program and eventually ending it in the medium term,” Solange Srour, the chief economist at ARX Investimentos in Rio de Janeiro, said in a telephone interview.

The new measures are designed to allow hedging and inject liquidity into the foreign-exchange market, with additional dollars provided as needed, according to the central bank. Brazil sold the equivalent of $98 million of swaps today and rolled over contracts worth $488.3 million.

The decrease in the daily amount offered can be seen as “an important step towards reducing interventionism in the currency,” Bruno Rovai, an emerging-market analyst at Barclays Plc in New York, wrote in an e-mailed response to questions. “The adjustments will be made in a gradual way, though.”

Yearly Decline

The real fell for a fourth straight year in 2014, declining 11 percent on concern the country’s fiscal deterioration and slow economic growth will lead to a reduced credit rating and amid speculation that an increase in interest rates by the U.S. Federal Reserve will sink demand for emerging-market assets.

Swap rates, a gauge of expectations for changes in borrowing costs, declined 0.01 percentage point today to 12.89 percent on the contract maturing in January 2017. They fell 0.04 percentage point in the week.

President Dilma Rousseff said during the swearing-in ceremony yesterday for her second term that she will tighten Brazil’s budget, increase investment and raise productivity in an effort to revive economic growth while minimizing “sacrifices” by the population.

“We will prove that economic adjustments are possible without revoking acquired rights or betraying our social obligations,” said Rousseff, who won the Oct. 26 runoff election by the narrowest margin of any president since at least 1945.

Budget Deficit

Since she took over from Luiz Inacio Lula da Silva four years ago, the budget deficit has more than doubled to 5.8 percent of gross domestic product and economic growth has come to a standstill. Inflation remained above the center of the official target range throughout her first term. The central bank increased the target lending rate twice since the election to contain consumer price increases.

Finance Minister Joaquim Levy, who was sworn in along with other cabinet members, has pledged to pursue a budget surplus before interest payments of 1.2 percent of GDP this year and at least 2 percent in 2016 and 2017 after Brazil’s credit rating was reduced in March for the first time in more than a decade.

The government announced last week cuts to pension and unemployment benefits that will save an estimated 18 billion reais ($6.7 billion).

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