Sao Paulo, May 15 (<a href=quote.bloomberg.com>Bloomberg) -- Brazil's real was headed for its biggest plunge in almost four months on concern its 19 percent gain in 2003 may prompt the government to bolster the U.S. currency to safeguard the growth of Brazilian exports.

The real fell 2.7 percent to 2.9675 per dollar at 3:45 p.m. New York time. The real remains the best performing currency in 2003 among the 59 tracked by Bloomberg even after its three-day, 3.6 percent decline. Mexico's peso fell to a two-week low.

There is this concern exporters and the government may push to prevent the real from strengthening further,'' said Sergio Machado, head of the Treasury desk at Banco Fator SA in Sao Paulo. Banks are trading on this speculation.''

President Luiz Inacio Lula da Silva's government is divided over the stronger real's possible effect on export growth, which may account for half of the Brazilian economy's projected 2.5 percent growth in 2003. While exporters have suggested the government take steps to weaken the real, a slowdown in inflation has prompted calls for the central bank to lower lending rates from a four-year high to boost domestic demand and growth.

Over the last week, the currency has traded in a range of 2.8425 to 2.9490 to the dollar as exporters buy reais as the real strengthens and importers buy dollars as it weakens.

``The great discussion over recent days has been the right level for the dollar that will preserve the trade balance and allow inflation to come down,'' said Clive Botelho, treasury director at Banco Santos SA.

Botelho and other investors say a rate cut would pare local banks' returns on Brazilian government securities engineered by raising money at low rates abroad to buy Brazilian Treasury debt.

Rates

Rates were raised five times since October from 18 percent to 26.5 percent as last year's 35 percent decline in the real sent inflation soaring to 12.53 percent, the highest 12-month rate since September 1996.

Botelho said many investors expect interest rates to come down in the second half, loosening up cash to buy dollars.

``We expect to see some significant decompression of monetary policy in the second half -- everyone's aware of that.''

Brazil's benchmark 8 percent bond that matures in 2014 fell for a second day, losing 1.75 cents on the dollar to 87.38, raising its yield to 11.17 percent, according to J.P. Morgan Chase & Co. The bond rose to a record high 91.75 on May 13.

Brazil's 11 percent bond that matures in 2012 led declines among the country's foreign currency bonds, losing 4.45 cents on the dollar, its biggest decline since Dec. 5, to trade at 98. At that price the bond yields 11.46 percent.

Mexico

Mexico's peso extended its two-day, 3.1 percent decline as lower interest rates and weakness in the U.S. economy prompted investors to sell pesos. The currency extended declines after the government said the economy contracted in the first quarter.

The peso fell 1.6 percent to 10.4370 per dollar. Earlier, the peso fell 1 percent as the day's trading opened, then reversed declines to rise 0.4 percent, before the afternoon's decline. The peso rose as high as 10.1075 yesterday.

The currency's two-day slide follows the decline of Mexican Treasury bill yields to record lows and the worst retail sales figures since 1991 in the U.S. The narrowing of the difference between U.S. and Mexican debt yields combined with the prospects of slower growth in Mexico's biggest export market have investors reluctant to hold pesos now, said Adam Weiner, Latin American strategist with AIG Trading Group in Greenwich, Connecticut.

People are concerned interest rates are at an all time low,'' said Weiner. At a certain point, people say the carry isn't as good as it was.''

Mexican Treasury-bill yields on May 13 fell to a record low at a government debt auction, which may signal that demand for peso-denominated securities will start to slow as interest rates fall below the inflation rate, analysts said.

Historic Lows

The 28-day Treasury bill's yield fell to 4.90 percent, its lowest ever, down from 9.7 percent in March while the 91-day bill' yield dropped to 5.59 percent from 6.19 percent a week ago.

Even with yields on U.S. Treasuries at four-decade lows -- the 10-year's yield fell to 3.52 percent yesterday -- Mexican securities no longer offer the large returns of earlier this year that helped the peso rebound from a record low in March.

The Mexican government's report this afternoon that the county's economy shrank 0.49 percent in the first quarter saw the peso extend declines.

Mexico has more to lose from slower growth in the world's largest economy than most other Latin American economies.

The U.S. buys about 85 percent of Mexico's $160 billion in annual exports, representing about a fifth of its $600 billion gross domestic product, and provides about 70 percent of the country's foreign investment.

Pace of Decline

Investors with a short-term interest in Mexico are pulling back some of their large peso positions now, explaining the speed of the drop, said Nathaniel Karp, an analyst at Grupo Financiero BBVA Bancomer SA in Mexico City.

There are no other investors with money to move the market like this,'' said Karp. They were coming in pretty hard, pretty strong before, and they were going to leave sooner or later.''

The peso-future contract for June delivery traded on the Chicago Mercantile Exchange fell to a low for May, losing 1.8 percent to trade at 9.5525 cents from 9.73 cents yesterday.

Mexican foreign-currency bonds fell for a second day. The 7 1/2 percent bond that matures in 2012 fell 0.5 cent on the dollar to 113.5 to yield 5.51 percent. The 8 1/8 percent bond due in 2019 fell 0.95 cent on the dollar to 115.20 to yield 6.60 percent and the 11 1/2 percent bond due in 2026 fell 1.1 cent on the dollar to 151, to yield 7.00 percent.

Colombia, Chile

Colombia's peso rose for the fifth day in six on investor expectations the country's central bank will keep its benchmark lending rate unchanged at its weekly meeting tomorrow.

The peso rose 1.2 percent to 2,809.29 per dollar after its 1.1 percent slide yesterday to a 2842.00 close. The peso has gained 2.1 percent against the dollar in 2003 after declining 21 percent last year.

The bank has raised its so-called repurchase agreement rate twice this year to 7.25 percent to slow accelerating inflation and a third increase might threaten growth.

Investors bought dollars yesterday after President Alvaro Uribe said he was concerned about the peso's 6.2 percent gain since January.

Many exporters fret the peso's rise may make Colombian exports less competitive abroad and derail a domestic economic expansion the government forecasts to reach 2 percent in 2003.

Cone

Chile's peso fell for the fourth day in five, losing 0.5 percent to 706.05 per dollar from 702.85 per dollar yesterday, paring its gain on the year to 2 percent.

Argentina's peso fell in both the spot and retail market, losing 1.9 percent to 2.8375 per dollar and 1.6 percent to 2.8450 per dollar respectively.

Peru's new sol was little changed at 3.4750 per dollar from 3.4749 per dollar yesterday. Venezuela fixed its bolivar at 1,598 per dollar earlier this year.

Last Updated: May 15, 2003 15:47 EDT