Brazil Real Hits Four-Year Low to Dollar

By Jack Whibley, Contributing Reporter

RIO DE JANEIRO, BRAZIL – The Brazilian real, dropped in value for the sixth successive time on Monday despite the Brazilian Central Bank’s attempts to curb the fall. Brazil’s currency closed on Monday at its lowest level since March 2009, when it reached 2.4152 per U.S. dollar, a drop of 0.9 percent to go with last week’s losses of more than five percent.

Over the past year the exchange rate against the dollar has fallen 16.99 percent, with the U.S. currency increasing by 4.99 percent in August alone. Last week’s rises prompted the Central Bank on Friday to sell US$1.076 billion in the futures market in an attempt to curb the dollar’s rise.

The Central Bank’s initial actions did not have the desired effects when the real reached 2.418 to the dollar. However, some of the tensions in the market were easing by Tuesday morning, when the real was being traded at 2.38 per dollar, after further interventions by the Central Bank.

As reported by Reuters, Central Bank chief Alexandre Tombini released a statement after the markets closed on Monday attempting to soothe the market. He reassured that the Central Bank would keep offering protection against currency volatility and warned against one-way bets on the real, saying investors could incur “losses”.

Brazil’s Finance Minister Guido Mantega also advised investors to avoid big bets against the real, saying that the Treasury and the Central Bank are working together to stabilize Brazilian markets. Mantega siad, “It’s only natural that investors want to make money, but they could lose money in the future.” He added that Brazil has a free-floating exchange rate that “fluctuates in both directions.”

Recent months have seen financial market turmoil resulting from the prospect that the Federal Reserve (Fed), the central bank of the United States, will reduce monetary stimulus for the U.S. economy. The Fed may raise interest rates and reduce the injection of dollars into the global economy if employment and production in the U.S. maintain their current pace of growth.

The momentum increased after the Fed’s chairman, Ben Bernanke, declared on June 19th that the Fed could reduce the purchase of assets by the end of the year if the U.S. economy continues to recover. If the volume of dollars in circulation falls, the currency’s price increases around the world.

In recent months, the Brazilian government has taken steps to curb the dollar’s rise, such as selling dollars in the futures market. The Central Bank also took part in compulsory bets that the dollar will fall in value and eliminated restriction deadlines for exporters to finance lump sum payments.

The government also removed barriers to entry for foreign capital. The Finance Ministry has reduced zeroed the Tax on Financial Transactions (IOF) from six percents for foreigners applying in fixed income in Brazil. The sale of foreign currency in the futures market was also exempt from IOF.

The weakening real has added to inflation fears in South America’s largest economy. Based on the most recent National Consumer Price Index calculations, inflation for this year is likely to be 5.74 percent. Projections for next year are now 5.80 percent, down from 5.85 percent but still significantly in excess of the government’s target of 4.5 percent.

The government’s hit and miss interventions in the financial market have also meant that the most recent estimates for economic growth are of little solace to investors. Research for the Central Bank shows GDP is expected to grow by 2.21 percent this year and 2.50 percent in 2014. Industrial production growth is predicted to be 2.08 percent this year and three percent for 2014.