Brazil's Real Reverses Losses; Mexico Climbs: Latin Currencies

Rio de Janeiro, May 16 (<a href=quote.bloomberg.com>Bloomberg) -- Brazil's real reversed losses to gain as importers took advantage of its four-day, 4.3 percent decline against the dollar to bring in export earnings.

The real rose 0.8 percent to 2.9425 per dollar at 4:07 p.m. New York time. Some banks bought dollars to protect themselves against weekend political developments that might drive the exchange rate when trading opens next week, prompting the real to jump between gains and losses today. Mexico's peso rose.

When the real rubs up against 3 per dollar, exporters bring in dollars,'' said Joao Medeiros, a partner at Pioneer Corretora de Cambio Ltda., a Sao Paulo currency brokerage that handles about a third of all foreign exchange trading in Brazil's spot market. When it's about 2.80, the opposite happens, the importers buy goods from abroad -- this is holding the currency in the range.''

Earlier, the currency fell as much as 1 percent on investors' concern a slowing U.S. economy may limit exports to the world's largest economy and the supply of investment capital. Increased flows of export earnings increases demand for the real, helping it rise against the dollar.

Also supporting real was a declaration by the president of Brazil's central bank that the country's 26.5 percent benchmark interest rate won't be cut until the inflation rate falls.

The time to lower rates will be determined by the rate of inflation,'' Henrique Meirelles told Madrid's daily El Pais while in Spain for meetings with Latin American central bankers. There will be no lowering of interest rates until inflation has been lowered.''

The real has gained 20 percent in 2003, the best performance of the 59 currencies tracked by Bloomberg. With its May 13-15 slide, the real will see its first weekly decline in 13.

Rates

If rates were to fall, the incentive to borrow dollars abroad to invest in Brazilian government securities will fall. So far this year about $5 billion of foreign debt has been sold abroad, most of it by banks taking advantage of low rates outside of the country, U.S. benchmark rates are at four-decade lows, to invest at four-year high yields at home.

While Brazil's benchmark inflation rate slowed in April to 0.97 percent from 1.23 percent in March, the 12-month rate in April rose to a seven-year high of 16.77 percent from 16.57 percent a month earlier.

Before today, the real had fallen 3.2 percent on the week on investors' expectations Meirelles and other members of Brazil's national monetary policy committee might lower rates after meetings May 20 and 21.

Weekends, Banks

The real jumped between gains and losses today.

Beyond the conflicting U.S. economic reports, the real was weighed down by some banks' purchases of dollars as a hedge against weekend political events, some traders said.

Investors in Brazil often seek to protect themselves against weekend developments, especially where politics, often played out in the nation's weekly news publications, is involved.

A couple of banks are concerned we might get some bad political news over the weekend,'' said Mario Battistel, head of foreign exchange trading at Novaca Corretora de Cambio SA, a Sao Paulo currency brokerage. They'd rather lock in their dollars now than risk having to buy them at a steeper price next week.''

President Luiz Inacio Lula da Silva's pension and tax bills that promise to curb deficit spending have stirred up opposition within and from without his ruling coalition.

The bill to overhaul the pension system, which aims to reduce the systems deficit that now stands at 5.5 percent of Brazil's gross domestic product, seeks to increase workers' contributions while cutting the government's funding liabilities.

Brazil's benchmark 8 percent bond maturing in 2014 gained 1.63 cents to 88.31 cents on the dollar, its first gain in three sessions, paring the yield to 10.91 percent, according to J.P. Morgan Chase & Co.

Earlier, it fell as low as 85 cents on the dollar, its lowest since April 28. The bond rose to a record 91.75 on May 13.

Mexico

The Mexican peso strengthened for the first day in three as investors took advantage of its two-day, 3.2 percent decline to buy dollars.

The peso rose 14.05 centavos, or 1.4 percent, to 10.2965 per dollar from 10.4370 per dollar yesterday.

Some investors bought the currency after its two-day slide, remaining confident Mexico's economy will rebound in 2003 after two years of slow growth and that inflation will be kept in check. Central Bank President Guillermo Ortiz repeated the goal of holding inflation to 3 percent plus or minus 1 percentage point this year in a speech in Seville, Spain.

Still, rates on the benchmark 28-day Treasury bill dropped to a historic low of 4.9 percent in the May 13 weekly auction of government debt, reducing investors' incentive to buy Mexican debt, said Bard Luippold, a currency analyst with Lehman Brothers Inc. in New York.

``The weakening trend could continue in Mexico and today is just a breather in front of the weekend,'' Luippold said.

Colombia

Colombia's peso was headed for its biggest decline in almost four months after the central bank left lending rates unchanged and called off the monthly auctions of government securities that have strengthened the currency 4 percent since February.

The peso fell for the first day in three, losing 1.5 percent to 2,849.5 per dollar from yesterday. The currency last had a bigger one-day loss on Jan. 27, when the currency fell to record low of 2,980 against the dollar.

The bank, which has sold $600 million of the options in three monthly sales since February, won't hold a sale in June. The peso has risen 4 percent since the bank's first sale Feb. 28.

``The exchange rate remains at a competitive level for Colombian exports,'' the bank said in a statement.

The bank suspended the next options sale to help halt a recent strengthening of the currency that prompted President Alvaro Uribe to warn that its rapid climb would hurt Colombian exports.

Cone

Argentina's currency plunged for a second day against the dollar after the country's next president said his government won't cater to business interests.

The peso plunged 2.5 percent to 2.89 per U.S. dollar, after losing 1.2 percent yesterday.

Nestor Kirchner spoke after his presidential challenger, Carlos Menem, withdrew from the race ahead of a runoff election weekend.

Chile's peso reversed early declines to rise 0.1 pecent to 705.05 per dollar from 706.05 per dollar yesterday. Peru's new sol was little changed at 3.4759 per dollar from 3.4758 per dollar yesterday. Venezuela fixed it bolivar at 1,598 this year. Last Updated: May 16, 2003 16:10 EDT