US Dollar Dropping Against Real

By Bruno De Nicola, Contributing Reporter

RIO DE JANEIRO – The US Dollar exchange rate has dropped to its lowest value since October 2008, caused by strong investments from abroad, and a craving for larger profits from the country’s high interest rates and the São Paulo stock market.

The Central Bank, lead by Henrique Meirelles, hoped to contain the currency’s drop by buying US$1.1 billion but the exchange rate fell to 2.027 Real to the Dollar by the end of play last Wednesday.

The quantity of US Dollars bought on May 20th by the Central Bank is the biggest since the beginning of September last year when the economic crisis was at its worst. For the past two months the Brazilian Monetary Authority has been selling US Dollars or making operations that ensure its future sales, in order to prevent the weakening of the Real.

At the beginning of May the Central bank started buying back the dollars, this time in smaller amounts of around US$100 or US$200 million per day. However the latest purchase is greater than the sum of all the smaller acquisitions during the last three weeks of transactions.

According to João Medeiros, Chief Financial Adviser at Pioneer, the US$2.4 billion bought in May appear to be the main problem, as there is simply too much US currency in Brazilian banks. He states that “The US currency is more likely to drop to R$1.80 than to increase above R$2.10″ which would leave the dollar reserves in limbo.

A closer look at events shows that the Real’s recovery actually started in March when foreign investors’ confidence returned to the Brazilian Market, but by May this strengthening assumed drastic proportions caused by a struggle between financial institutions and the Central Bank.

At the beginning of the month the monetary authority sold US$3.412 billion to private bankers through Circuit Breakers – swap contracts which are intended to prevent a market free-fall.

In this kind of operation the Central Bank buys back the currency on a set date and at an invariable price and pays an interest fee for the period. Clearly, should the US Dollar quote be higher than the set price by the agreed date, the Central Bank will profit from the Circuit Breakers.

However, if the US currency’s value keeps below the set price, the private bankers end up increasing their wealth.

The set date for such a huge swap operation is the first of June, so the financial institutions are doing all they can to force the market to keep the US Dollar exchange rate low. Since the 30^th of March 2009 the US Dollar quotation has dropped significantly from 2.332 to 2.027, marking a 0.86% variation.