Brazil Real Advances as U.S. Data Dim Fed Tightening Prospects

Brazil’s real climbed to an eight-week high after weaker-than-forecast U.S. economic data added to speculation the Federal Reserve will keep borrowing costs low, bolstering the outlook for emerging markets.

The real rose 0.4 percent to 2.5735 per dollar at the close of trade in Sao Paulo, the strongest level on a closing basis since Dec. 3. Swap rates, a gauge of expectations for changes in borrowing costs, fell 0.03 percentage point to 12.33 percent on the contract maturing in January 2017.

Most developing-nation currencies rallied as a report a day before the Fed’s policy decision showed orders for business equipment in the U.S. unexpectedly fell in December. The real climbed last week as Brazil’s central bank signaled further increases in borrowing costs while euro-area policy makers announced the expansion of stimulus measures keeping rates low.

The U.S. economic report “is good news for the emerging markets as the cheap money conditions will keep the risk appetite sustained and because the investors will keep chasing the rate differential,” Ipek Ozkardeskaya, an analyst at Swissquote Bank SA in Gland, Switzerland, said in an e-mailed response to questions.

In Brazil, Finance Minister Joaquim Levy is trying to regain investor confidence and boost the economy through spending cuts and tax increases and announced last week higher levies on fuel, imports, credit and cosmetics.

“Topics such as the fiscal adjustment, cutting spending and the resumption of the national government’s credibility must be addressed,” Ricardo Gomes da Silva Filho, a trader at Correparti in Curitiba, Brazil, said in an e-mailed note to clients, referring to the cabinet meeting.

Fiscal Deterioration

Brazil raised taxes and cut spending to promote a necessary fiscal rebalancing that will create conditions for inflation to slow and interest rates to fall in the medium term, President Dilma Rousseff said at the start of her first cabinet meeting since her second term began Jan. 1.

Concern that Brazil’s fiscal deterioration and a weak economy will lead to a reduced credit rating helped push the real down 11 percent in 2014.

To support the real and limit import price increases, the central bank sold the equivalent of $98.5 million of currency swaps Tuesday and rolled over contracts worth $487.9 million.

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