Brazil Real Drops as Carry Loses Appeal Amid Strong U.S. Data

  • Brazil’s currency falls for first time in four trading days
  • Buying real with borrowed dollars has returned 33% this year

The real slipped as the U.S. economy advanced more than forecast, bolstering the dollar and dimming appetite for the world’s most-profitable carry trade.

In a carry trade, investors borrow money in a low-yielding currency to invest it in a country with higher yields. Brazil’s benchmark interest rate is 14.25 percent -- more than 28 times the U.S. equivalent and the highest of any major currency. Borrowing dollars to lend in reais has returned 33 percent as investors lured by the difference in rates have turned the real into the world’s best-performing currency this year.

Traders are pricing in a higher probability of a rate increase in the U.S. this year after gross domestic product in the world’s largest economy expanded more in the second quarter than previously estimated. Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, on Thursday said the U.S. economy is primed for an increase in borrowing costs.

Brazil’s currency weakened 1.3 percent to 3.2597 per dollar Thursday in Sao Paulo. 

"The real is being pressured as the dollar recovers against the emerging and the commodities currencies," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.04 percentage point to 12.2 percent. On Tuesday, they had dropped to the lowest level since January 2015.

The swap rate has fallen more than half a percentage point since the end of August as traders increase bets that the Brazilian central bank’s new president, Ilan Goldfajn, will cut rates in October. That view was supported last week when policy makers said that consumer price increases will be within the official target range next year for the first time since 2009 and conditions for an easing of monetary policy are improving.

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