Brazil's Real Weakens Past 2.08/Dollar on Growth Concerns
06/27/2012| 04:19pm US/Eastern
--Brazil real closes weaker than BRL2.08/U.S. dollar for first time since May 22
--Investors say stimulus measures likely to have marginal effect
--Central bank needs to be more aggressive to contain BRL weakness, traders say
(Updates with closing price in second paragraph, analyst comments starting in fifth, central bank auction in last paragraph.)
SAO PAULO--The Brazilian real weakened past 2.08 per dollar for the first time in a month Wednesday on growing skepticism about the efficacy of government moves to stimulate the domestic economy and contain the real's slide, while lingering debt woes in Europe undermine expectations for global growth.
The real exited active trading at 2.0844 to the dollar, weaker than its previous close at BRL2.0701, according to Tullett Prebon via Factset, and the first time the currency has closed weaker than 2.08 per dollar since May 22.
Flagging growth in Latin America's biggest economy has raised expectations of further rate cuts by Brazil's central bank, reducing the attractiveness of Brazil investments. With inflows expected to slow, the currency has been weakening, prompting the central bank to intervene in currency markets to prop up the real.
Yet macroeconomic measures and the market interventions have apparently had little effect, economists say.
A New York-based trader wrote Wednesday that the current weakness in the real suggests that "the market is now testing the BCB resoluteness" in stepping into markets to slow the real's decline. Outflows of corporate profit from Brazil and the existence of the IOF tax on financial operations "are making this task much easier," the trader wrote.
A $4 billion stimulus program announced Wednesday, in which the government promised to step up purchases, also didn't convince everyone.
"Interventions in the market have been coming on the consumer end, but if the economy doesn't react and GDP growth doesn't advance, even with these actions, it shows the inefficacy of the government's weapons," said Adilson Goes, director of fixed-income investments at Sao Paulo brokerage Fair Corretora. "The feeling is 'things are bad now, what are we going to do?' And when the market is stressed like that there's no way around it: the dollar is going to gain."
In Europe, meanwhile, leaders are set to meet in coming days to try to find resolutions to the current crisis. Spain's prime minister Wednesday urged approval of "urgent" mechanisms to allow fragile economies to refinance debt, issuing a warning that his country wouldn't be able to sustain steep borrowing costs for much longer. But investor expectations of some kind of resolution to the lingering debt crisis in the region are low.
A dollar swap announced Tuesday by Brazil's central bank also did little to hold back the decline in the real. The central bank sold $2.996 billion in swap contracts, in which investors exchange paper linked to domestic interest rates for contracts indexed to the U.S. dollar.
These auctions are a tool to smooth volatility in the exchange market at times when the Brazilian real is weakening sharply against the dollar.
But the swap auction was carried out to replace expiring contracts, traders said, and so didn't soothe market demand.
"If the government wants to bring the rate back down to BRL2 per dollar, it's going to have to sell dollars on the spot market" rather than depending on swaps, Mr. Goes said in a phone interview.
The central bank announced another auction for Thursday at the end of the trading day, when the real had broken past 2.095 per dollar, and helped pare the currency's losses for the day.
Write to Paulo Winterstein at email@example.com