Brazilian Real Leads Declines as China Triggers Rout in Iron Ore

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The real led losses among major currencies as China’s equity meltdown triggered a plunge in the price of Brazil’s iron-ore exports.

A drop in the shares of Rio de Janeiro-based Vale SA, the world’s biggest miner of the raw material, added to concern that international investors are withdrawing funds from Brazil. Iron ore sank Wednesday to the lowest level in at least six years as China’s stock decline threatened demand just as the largest producers including Vale raised output.

“Plummeting iron-ore prices put pressure on the real,” Kenneth Lam, a Citigroup Inc. strategist in New York, wrote in a research report to clients.

The real slid for a fourth straight day, falling 1.5 percent to 3.2353 per dollar at the close of trade in Sao Paulo, the weakest level since March 27. The decrease was the biggest among 31 major tenders tracked by Bloomberg.

The currency briefly pared losses after Federal Reserve officials expressed concern over China and Greece in minutes of the June 16-17 meeting, adding to speculation that U.S. interest rates will stay at a level supporting higher-yielding assets longer than expected. Yet the officials also said the U.S. economy was moving toward conditions that would allow monetary tightening.

Brazil’s swap rates declined to a one-month low as slower-than-forecast inflation added to speculation that policy makers will limit increases in borrowing costs.

“Inflation coming in below expectations brings some relief in the very short term,” Reginaldo Siaca, a currency manager at Tov Corretora de Cambio in Sao Paulo, said in a telephone interview. “Still, there is so much to be done.”

While the government reported that inflation accelerated in the 12 months through June to 8.89 percent, the rate was slower than the median forecast of economists surveyed by Bloomberg, which called for consumer prices to increase 8.94 percent.

Policy Outlook

Minutes of the July 28-29 central bank meeting will probably signal policy makers are close to ending monetary tightening based on current economic performance, Valor Economico columnist Cristiano Romero reported, citing unidentified policy makers.

Swap rates on the contract maturing in January 2017 dropped 0.06 percentage point to 13.66 percent, the lowest level on a closing basis since June 9.

Brazil is the only Group of 20 nation raising borrowing costs this year, contributing to a lag in growth. Inflation remains above the official target even after the central bank lifted its benchmark lending rate for a sixth straight time June 3, increasing it to 13.75 percent.

On Wednesday, the central bank extended the maturity on 6,000 currency swap contracts. Last week, it lowered the total amount offered in a rollover from 7,100.