Bloomberg News

Brazil Real Falls After Bernanke Lowers Stimulus Expectation

July 14, 2011

July 14 (Bloomberg) -- Brazil’s real weakened after Federal Reserve Chairman Ben S. Bernanke said he won’t take immediate action to stimulate the economy, reducing demand for higher- yielding assets.

The real fell 0.2 percent to 1.5791 per dollar at 5 p.m. New York time, from 1.5755 yesterday. The currency earlier strengthened as much as 0.4 percent.

The Fed won’t immediately embark on a third round of bond buying because of faster inflation this year, Bernanke said at a Senate hearing. He said yesterday that policy makers are prepared to take additional action should the economy appear to be in danger of stalling.

“The market is just trading on headlines,” said Ram Bala Chandran, a Latin America currency and rates strategist at Citigroup Inc. in New York. “Bernanke’s comment today meant QE3 will not come, which triggered a selloff of higher-risk assets.”

Brazil’s growth prospects are being limited by the strength of the real, which has climbed 47 percent since the end of 2008, as well as external factors, said Augusto de la Torre, the chief economist for Latin America at the World Bank, at the Bloomberg Brazil Conference today in New York.

The country risks becoming a “prisoner of its own hype” as it faces the twin dilemmas of a strengthening currency and consumer price increases above the central bank’s target, Christopher Sabatini, senior policy director for the Council of the Americas, said at the same conference.

Growth Outlook

Brazil’s economy, the biggest in Latin America, will expand 4 percent this year, the United Nations’ economic unit for the Latin American and Caribbean region, known as Cepal, said in a report yesterday. The growth slowed to 4.2 percent in the first quarter, from 5 percent in the previous three months.

The credit rating for Latin America’s largest economy is unlikely to be upgraded again this year without fundamental changes to its macroeconomic structures, according to Mauro Leos-Lopez, an analyst at Moody’s Investors Service. The agency raised Brazil’s debt rating by one level to Baa2 last month.

Yields on Brazil’s interest-rate futures contract due in January 2012 fell one basis points, or 0.01 percentage point, to 12.47 percent.

--Editors: Richard Richtmyer, Brendan Walsh

To contact the reporters on this story: Belinda Cao in New York at Lcao4@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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