Brazil Real Rises 1st Day in 3; Mexico Falls: Latin Currencies

June 3 (<a href=quote.bloomberg.com>Bloomberg) -- Brazil's currency rose for the first day in three after Banco Bradesco SA, the country's third-largest bank, sold $150 million of debt, raising investors' expectations capital flows to the country will rise.

The real rose as much as 1.5 percent to 2.9345 per dollar in Sao Paulo trading after Bradesco sold the bonds, raising three times the originally announced amount of 18-month bonds. The real was at 2.9440 per dollar, or 1.1 percent stronger than yesterday's close, at 3:59 p.m. New York time.

The real, which has gained 20 percent this year against the dollar, the best performance of the world's 16 most traded currencies, was also bolstered after Fitch Ratings raised its outlook on Brazil's debt to positive from stable.

The flows remain strong,'' said Daniel Vairo, a trader with Opportunity Asset Management Ltda., a Rio de Janeiro-based company that manages about 7 billion reais of bonds and stocks. As much as $200 million to $500 million could come in the next two weeks.''

Brazilian banks and companies have sold more than $5 billion of foreign-currency debt in 2003, taking advantage of U.S. interest rates at four-decade lows to borrow abroad and invest at home where rates are at 26.5 percent a year or more. Banco Bradesco SA, Brazil's third-largest bank, completed its sale today.

The yield on 2-year U.S. Treasury bonds, a benchmark for U.S. borrowing fell to 1.198 percent, the lowest in more than 53 years. Rates in Brazil are at four-year highs. The Bradesco bonds will pay interest of 4.8 percent.

Hedging Bet

Such flows may be enough, Vairo added, to limit the effect of yesterday's central bank auction of interest-rate swaps, a contract used by investors to insure against declines in the real against the dollar.

Last week the government ended its promise to refinance all of its $100 billion of interest-rate swaps, known in Brazil as ``cupom cambial.'' At yesterday's auction, it sold 77.8 percent of the total of swaps and dollar-indexed debt maturing June 12, a move that some believe will force companies to buy dollars in the spot market to hedge against currency risk.

So far demand for hedge is not materializing,'' said Carlos Gandolfo, a partner at Pioneer Corretora de Cambio Ltda., a Sao Paulo currency brokerage that handles about a third of all currency trades in Brazil's spot market. Exports and other capital flows to the country are strong, and that's helping the real today.''

Tipping Point

The debt-rating upgrade by came after the government of Luiz Inacio Lula da Silva implemented policies to control spending and pass changes to the pension and tax systems aimed at reducing the country's $400 billion debt, Fitch said in a statement.

An alliance between Lula's Workers' Party and the Democratic Movement Party, or PMDB, was also a factor in the change, Fitch said.

The alliance with the PMDB puts them over the tipping point to win a constitutional amendment that would allow passage of pension and tax reforms,'' Morgan Harting, sovereign risk analyst for Fitch in New York. We think default risk has been reduced, there is less uncertainty about Lula today than there was a few months ago.''

A higher credit rating would make the country more attractive to some investors and could lower the cost Brazil must pay to borrow from investors abroad.

Brazil's B long-term sovereign credit rating means investment in the country's debt is highly speculative'' and that financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business climate,'' according to Fitch ratings definitions.

Debt, Outlook

Today, Brazil sold 5.82 billion reais of fixed- and floating- rate debt at its regular Tuesday bond auction. It sold 3.32 billion reais of floating-rate notes, known as LFT's, and 2.5 billion reais of fixed-rate Treasury notes, known as LTN's.

The real rose in the futures market. The U.S. dollar contract for July 1 settlement, the most traded on Sao Paulo's BM&F commodities and futures exchange, fell 1.4 percent to 2.990 reais to the dollar.

Brazil's 8 percent bond maturing in 2014 rose 0.56 cent to 89.56 cents on the dollar, paring the yield to 10.59 percent, according to J.P. Morgan Chase & Co.

Regional Currencies

Mexico's currency weakened for the second day in three after yields on the benchmark 28-day Treasury note fell to a record low at the central bank's debt auction today.

The peso fell 0.4 percent to 10.2745 per dollar from 10.2470 yesterday, paring its gains in 2003 to 0.8 percent, the 12th-best performance of the 16 most widely traded currencies.

Mexico's benchmark one-month Treasury bill yield fell to 4.72 percent from 4.91 percent a week ago at a government debt auction. The 91-day bill's yield fell to 5.11 percent from 5.43 percent a week ago, the central bank said on its Web site.

Chile's peso fell for the first day in four, pacing the price declines of the country's biggest export, copper.

The peso fell 0.3 percent to 713.05 per dollar from 711.10 yesterday as copper declined for the first day in four in New York trading.

Argentina's peso gained for a third day, rising 0.4 percent to 2.8375 per dollar to boost its gain in 2003 to 18 percent, the second-best performance among 59 currencies tracked by Bloomberg.

Colombia's peso weakened for the first day in three, declining 0.1 percent to 2,848.73 per dollar. Peru's new sol was little changed at 3.4922 per dollar from 3.4932 yesterday. Venezuela fixed its bolivar at 1,598 per dollar this year.