Brazil Real Rises to 11-Month High; Mexico Up: Latin Currencies

June 13 (<a href=quote.bloomberg.com>Bloomberg) -- Brazil's real rose to an 11-month high on investor expectations capital flows to South America's largest economy will remain strong as investors seek higher returns than available in Europe or the U.S.

The real rose 0.9 percent to close at 2.8385 per dollar from 2.8635 yesterday in Sao Paulo. The real has gained 25 percent this year, the best performance of the 16 most widely traded currencies. The Mexican and Colombian pesos gained.

Brazilian companies and the government have sold more than $8 billion of foreign-currency bonds this year, boosting demand for the local currency as the proceeds are brought into the country and exchanged for reais. About $1.5 billion was sold this week, and companies such as Gerdau SA and Cia. de Saneamento Basico do Estado de Sao Paulo are expected to sell soon.

The market is betting flows will continue -- the outlook for Brazil risk is improving,'' said Flavio Datz, a trader with Agora CTVM Ltda., a Rio de Janeiro brokerage. The government has done a good job to balance expectations, small rises are matched by small declines. We're at a kind of equilibrium.

International investors have helped push up prices on emerging market assets as declining interest rates in Europe and the U.S. plumb the lowest levels in decades.

Yields on European bonds fell to a three-decade low today on speculation a faltering economic rebound will prompt the European Central Bank to pare its benchmark interest rate in coming months. Yields on U.S. five-year notes fell to a 50-year low after reports showing declines in producer prices and consumer confidence added to speculation the Federal Reserve will cut interest rates.

Brazil's benchmark target overnight lending rate has been held at a four-year high of 26.5 percent for three months in a bid to slow inflation running at its fastest pace in seven years.

Ahead

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 percent to 2.8610 reais to the dollar.

Interest rate futures fell for the fifth day in six. The futures rate on one-day bank deposits for January delivery, the most-traded the BM&F, fell 25 basis points to 23.16 percent from 23.41 percent yesterday. The contract indicates investor expectations for the end of December. A basis point equals 0.01 percentage point.

Brazil's 8 percent bond maturing in 2014 rose from yesterday's record closing high, adding 0.19 cent to 92.19 cents on the dollar, paring the yield to 9.90 percent, according to J.P. Morgan Chase & Co.

Mexico

Mexico's peso rose for the second day in three after Mexico's central bank took no action on interest rates in its regularly scheduled twice-monthly meeting on monetary policy.

The peso gained 1.1 percent to 10.5385 per dollar from 10.6595 yesterday in Mexico City and U.S. trading. The currency has declined 1.6 percent in 2003, the worst performance of the 16 most widely traded currencies.

Banks are playing a game with the central bank and interest rates,'' said Luis Garcia Pena, who manages $360 million in debt at Investra Consultores in Monterrey, Mexico. When interest rates fall, people sell off their positions and buy dollars.''

The central bank, which raises and lowers peso lending to commercial banks in an effort to influence interest rates, said that the daily money-market short will remain at 25 million pesos a day ($2.4 million), or 700 million pesos per month.

The currency rose in the futures trading, with the peso contract for September delivery, the most traded on the Chicago Mercantile Exchange, rising for the second day in three, adding 1.5 percent to 9.3875 pesos per dollar.

Colombia, Argentina

Colombia's peso rose for the first day in three, adding 0.4 percent to 2,821.40 per dollar from 2,833.10 per dollar yesterday.

Chile's peso was unchanged at 707.55 per dollar and Argentina's peso rose 0.3 percent to 2.8280 per dollar, boosting its gains against the dollar in 2003 to 19 percent, the second- best performance of the 59 tracked by Bloomberg.

Peru's new sol strengthened for a third day, gaining 0.2 percent to 3.4703 per dollar from 3.4783 per dollar yesterday in Lima, boosting its gains in 2003 to 1.3 percent. Venezuela fixed its bolivar at 1,598 per dollar earlier this year. Last Updated: June 13, 2003 16:22 EDT