Brazil Real Gains After Swap Sale; Mexico Up: Latin Currencies

June 11 (<a href=quote.bloomberg.com>Bloomberg) -- Brazil's currency closed at its strongest level since July after the central bank sold $762 million of contracts used to guard against declines in the real, reducing demand for dollars from traders.

The real rose 0.6 percent to 2.8515 per dollar after falling as low as 2.8835 in Sao Paulo. The real's 24 percent gain in 2003 is the best performance of the 16 most widely traded currencies. Mexico's peso rose.

The central bank's swap sale should help the currency by giving traders insurance against future declines, easing the need to buy dollars in the swap market. The bank sold 72.9 percent of the contracts, known as interest rate swaps, that mature June 18, prompting some investors to anticipate another sale.

The central bank will come back and roll over the rest,'' said Carlos Gandolfo, a partner at Pioneer Corretora de Cambio Ltda., a Sao Paulo currency brokerage that handles about a third of trading in Brazil's spot market. It was the bank's decision, had nothing to do with demand and was absolutely within expectations.''

Brazil has about $58 billion reais of outstanding swaps and dollar-indexed national Treasury notes. Most were sold to bolster the real against the dollar amid Argentina's 2001 default and investor concern Brazilian President Luiz Inacio Lula da Silva, elected in October, might default on $400 billion of public debt. The real last closed at a stronger level than 2.8515 on July 18.

Balance

Government officials want to cut the dollar-risk of selling the swaps, which oblige the central bank to pay investors for declines in the value of the real. Companies that need to pay for imports or foreign debts have bought the swaps as a hedge against a weakening in Brazil's currency before buying dollars.

At the same time, investors can buy the swaps instead of buying dollars, and so reduce demand for dollars and prevent a weakening of the real. Some Lula administration officials and exporters have voiced concern that the real's gains in 2003 might undercut a surge in exports that has been a motor of growth.

To be sure, with consumer prices accelerating at their fastest pace in seven years after the real's 35 percent decline in 2002, many investors expect the bank to slowly reduce the amount of swaps outstanding to head off another bout of currency weakness and inflation. A renewed pick-up in inflation might delay cutting lending rates that are now at four-year highs and are weighing on the economy.

``It's possible the central bank will start reducing gradually the amount of rollover,'' said Marco Antonio Azevedor, foreign exchange manager at Banco Brascan in Rio de Janeiro.

Brazil's benchmark 8 percent bond that matures in 2014 rose .13 cent to 91.63 cents on the dollar, reducing the yield to 10.05 percent, according to J.P. Morgan Chase & Co.

Mexico, Chile

Mexico's currency gained after the yields on government debt rose at yesterday's government debt auction, damping concern that the central bank will cut interest rates this Friday.

The peso rose for the second day in three, gaining 0.8 percent to 10.5730 per dollar from 10.6590 yesterday in Mexico City and U.S. trading, paring its loss in 2003 to 1.9 percent.

``You have a bit of a recovery in interest rates, which is helping the peso a bit,'' said Guillermo Estebanez, a currency strategist at Banc of America Securities Inc. in San Francisco.

Last week's four-day, 4.1 percent peso decline threatened to revive inflation and boosted the odds the central bank would move to cut interest rates, said Edgar Amador, an economist at Stone & McCarthy in Mexico City. Yesterday, the 28-day government yield rose to 5.64 percent from a record low of 4.72 percent.

Record-low government yields, falling consumer prices in May and remarks by central bank officials that the Mexican economy is growing less than expected, last week triggered sales of peso future contracts on the Chicago Mercantile Exchange. Investors had built up a record high level of contracts betting on the peso's appreciation in May, accumulated during the currency's 10 percent rise from March 5 to May 13.

Chile's peso rose for the first day in three, gaining 0.4 percent to 714.35 per dollar from 717.25 yesterday.

Colombia, Argentina

Colombia's peso weakened 0.4 percent to 2,827.50 per dollar and Argentina's peso weakened 0.5 percent to 2.8225 per dollar. Argentina's peso is the second-best performing currency against the dollar in 2003 among 59 tracked by Bloomberg, rising 19 percent.

Peru's new sol strengthened 0.2 percent to 3.4828 per dollar. Venezuela fixed its bolivar at 1,598 per dollar this year.