Brazilian real rises as short-dollar reserve requirements eased

Brazil’s real rose for the first time in four days as the central bank eased reserve requirements on bets against the dollar to boost the local currency.

The real appreciated 0.5 percent to 2.0892 per U.S. per dollar at 4:33 p.m. in Sao Paulo. Swap rates on contracts due in July 2014 increased two basis points, or 0.02 percentage point, to 7.27 percent.

Financial institutions will be required to collect reserve requirements on short dollar positions above $3 billion starting Dec. 20 instead of the previous $1 billion level. A short is a bet an asset will lose value.

“If the central bank is making those rules more flexible, it’s because it wants a stronger real,” Reginaldo Siaca, the currency manager at Advanced Corretora de Cambio in Sao Paulo, said in a phone interview. “The central bank wants the market to cede a bit so the exchange rate doesn’t affect inflation.”

The government started this month loosening capital controls it imposed in the past two years after the real tumbled to a three-year low on Nov. 30 as the economy grew in the third quarter at half the pace forecast by analysts.

Swap rates rose today as the Foundation Economics Research Institute reported that Sao Paulo’s consumer prices increased more than economists forecast, spurring speculation the central bank will begin raising borrowing costs to stem inflation.

Brazil’s policy makers left the target lending rate at a record low 7.25 percent last month following 10 straight reductions. Traders use interest-rate swaps to bet on the direction of borrowing costs.

Falling Real

The real has fallen 10.6 percent this year, the worst performance among 16 major currencies tracked by Bloomberg. The weakness in the exchange rate is inflating the cost of interest payments for Brazilian borrowers and sapping profit at companies with expenses in dollars such as Petroleo Brasileiro SA and Gol Linhas Aereas Inteligentes SA.

Policy makers have swung in 2012 between selling currency swaps aimed at preventing the real from depreciating too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening.

The central bank sold $2.1 billion in currency swaps on Dec. 3 and $1.6 billion on Nov. 23 to stem the real’s declines. From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar.

Foreign direct investment, which has hovered at almost record levels in recent years even as global economic growth has slowed, will increase by $2 billion to $65 billion next year, the central bank reported today. That is just enough to cover the expected current account gap next year. Foreign direct investment in November was $4.6 billion, more than the $3 billion forecast by economists.

Bloomberg News

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