Bloomberg News

Real Sinks to 16-Month Low, Extends Month’s Drop to 15 Percent

September 21, 2011

Sept. 21 (Bloomberg) -- Brazil’s real tumbled, bringing its decline this month to 15 percent as the worst performer in Latin America, on growing concern the central bank is mismanaging interest-rate policy at a time when global economic conditions are deteriorating.

The real extended losses after Federal Reserve policy makers said there are “significant downside risks to the economic outlook.” The currency slumped as much as 5.8 percent to a 16-month low of 1.8960 per dollar and ended trading down 4.8 percent at 1.8756 as of 5 p.m. in New York.

Brazil’s currency, which was up 46 percent from the end of 2008 through August as growth in Latin America’s largest economy picked up, began sinking after the central bank lowered the benchmark interest rate for the first time in two years on Aug. 31 to guard against a global slowdown. The government had taken steps to weaken the currency, including boosting taxes on bond investors, to help exporters compete.

“Cutting interest rates, screwing around with currency measures -- the fact these measures are coming at a time when markets are really, really nervous about the world -- I think it’s magnified it,” said Win Thin, global head of emerging- markets currency strategy at Brown Brother Harriman & Co. In New York.

Longer Bonds

The Fed will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less in an effort to further reduce borrowing costs and keep the economy from relapsing into a recession. The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” policy makers said today in Washington.

“The market became a little more negative” after the Fed’s statements about the outlook for the U.S. economy, Felipe Brandao, an emerging markets analyst at ICAP Brasil, said in a phone interview in Sao Paulo. “It could take more time for the American economy recover.”

Japanese retail investors helped accelerate the decline as they withdrew 60 billion yen ($786 million) from mutual funds invested in foreign assets in the week ended Sept. 16, according to data from Nomura Holdings Inc., the biggest brokerage firm in Japan.

“The real was the darling among foreign investors, but it has not been so because of this deterioration in economic policies,” said Newton Rosa, chief economist at Sul America Investimentos in Sao Paulo.

Government Concern

The decline has been gradual and can be absorbed by the economy, Finance Minister Guido Mantega said today in Washington. Mantega, who accused the U.S., Japan and Europe last year of sparking a global “currency war” by keeping rates near zero and pushing capital to developing nations, imposed on 1 percent tax on foreign derivatives in July after the real surged to a 12-year high.

Only a big decline in the currency would be a worry to the government, Mantega told reporters today.

Since October, Brazil has tripled to 6 percent a tax on foreigners’ purchases of bonds, raised the cost of foreign borrowing by local companies and restricted banks from betting against the dollar to prevent the currency from rallying.

President Dilma Rousseff today urged world leaders to stop manipulating their currencies and said Brazil’s economy doesn’t have limitless resources to weather a global crisis.

‘Impose Controls’

“We know our ability to withstand isn’t unlimited,” Rousseff said at the United Nations General Assembly in New York today. “We need to impose controls on the currency war.”

Brazil’s central bank, led by President Alexandre Tombini, lowered the benchmark interest rate a half percentage point to 12 percent last month even as inflation surged to a six-year high.

The real tumbled 4.8 percent against the yen to 40.7750 yen, extending its decline this month to 15 percent. Japanese individual investors held $102 billion in real-denominated assets at the end of August, making them among the biggest investors in Brazil, according to Nomura.

“The big thing this week is there’s been talk that Japanese retail funds have been cutting out of Brazil positions,” Thin said.

Yields on most interest-rate futures contracts rose after inflation accelerated more than economists expected though mid- September.

Yields on the interest-rate futures contract due in January 2013, the most actively-traded today in Sao Paulo, increased 10 basis points, or 0.1 percentage point, to 10.79 percent.

Annual inflation in Latin America’s biggest economy accelerated to 7.33 percent in mid-September from 7.1 percent a month earlier, the government said yesterday.

The inflation rate doubled this month from the 0.27 percent reading in mid-August, led by a 1 percent jump in clothing prices and 0.72 percent increase in the cost of food and beverages, the statistics agency said.

Inflation first breached the 6.5 percent upper limit of the government’s annual target range in May.

--With assistance from Gabrielle Coppola in Rio de Janeiro. Editors: Brendan Walsh, Laura Zelenko.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Josue Leonel in Sao Paulo at jleonel@bloomberg.net

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


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