Brazil’s Real Drops Most in Two Weeks on Federal Reserve Outlook

Brazil’s real fell the most in two weeks as concern the Federal Reserve will raise U.S. interest rates sooner than expected sank demand for assets from emerging markets.

The real slid 1 percent to 3.0881 per dollar at the close of trade in Sao Paulo, the biggest drop on a closing basis since March 27.

Most emerging-market currencies fell a day after a report indicating strength in the U.S. labor market added to speculation that the Fed will tighten monetary policy. The real was still up 1.5 percent this week as party leaders in Brazil’s ruling coalition agreed to support the government’s budget plan.

“There is a broadly higher dollar and a very limited appetite for higher-yielding emerging markets today,” Jessica Strasburg, an economist at CM Capital Markets in Sao Paulo, said in a telephone interview.

Finance Minister Joaquim Levy said Friday in Goiania, Brazil, that the government must demonstrate to investors that public finances are in order.

The party leaders signed an agreement this week to support the government’s plan to narrow the budget deficit after Vice President Michel Temer took over negotiations with lawmakers.

Fed Outlook

Evidence of U.S. labor market strength has pushed the real down for two straight days. A report Thursday showed that an average 282,250 U.S. workers a week applied for jobless benefits in the month ended April 4, the fewest since June 2000.

Minutes from the Fed’s latest meeting published earlier this week showed officials were split on when to increase borrowing costs, with some wanting to normalize policy starting in June and others favoring later in the year.

“The market is clearly USD-driven while the dollar itself swings on expectations for the first rate hike,” Ipek Ozkardeskaya, a market analyst at London Capital Group, said by e-mail.

Swap rates on the contract maturing in January 2017, a gauge of expectations for changes in Brazil’s borrowing costs, decreased 0.08 percentage point to 13.02 percent. They are down 0.21 percentage point this week.

While Brazil halted at the end of March the sale of currency swaps supporting the real and limiting import price increases, the central bank is still doing rollovers, extending the maturity Friday on swap contracts worth $513.2 million.

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