Brazil Real Has Biggest Drop in 13 Months as U.S. Slump Spreads

By Adriana Brasileiro

Sept. 17 (Bloomberg) -- Brazil's real dropped the most in 13 months on concern the U.S. takeover of insurer American International Group Inc. will fail to stem financial market losses in the world's biggest economy.

The real sank 3.3 percent to 1.8667 per dollar at 11:07 a.m. New York time, from 1.8080 yesterday. It earlier touched 1.8847 per dollar, its weakest since September 2007. The real is the biggest decliner among the 16 major currencies this month, having plunged 12.6 percent against the dollar. It is down 17 percent from a nine-year high of 1.5545 reached Aug. 1.

``The market is in a frenzy,'' said Vanderlei Arruda, who manages the foreign-exchange trading desk at Sao Paulo-based Corretora Souza Barros. ``There is more tension every day and this is making investors, especially foreigners, pull their money from here.''

The real led a tumble in currencies across Latin America as investors piled into the safety of Treasuries after the U.S. took control of American International Group Inc. yesterday following the collapse of Lehman Brothers Holdings Inc. Rates on U.S. Treasury three-month bills dropped to as low as 0.233 percent, the lowest since at least 1954.

Mexico's peso sank 1.3 percent to 10.8581 per dollar and Colombia's peso declined 1.4 percent to 2,133 per dollar.

``After Lehman, we entered a new phase in which the positive effects of good news are very short-lived,'' said Marcelo Voss, chief economist at brokerage Liquidez Corretora in Sao Paulo. ``Investors will stay away from risk as much as possible.''

`Very Small Risk'

The real's decline today is the biggest since July 27, 2007, when concern began to build that subprime mortgage losses would weaken the U.S. financial industry and erode demand for higher- yielding, emerging-market assets. The real's 14 percent loss over the past 30 days is the biggest monthly decline in six years.

Brazilian Finance Minister Guido Mantega sought to shore up confidence in the currency, telling reporters in Brasilia today that there's a ``very small risk'' that the U.S. financial crisis will spread to Latin America's biggest economy.

Mantega called the local financial system ``solid'' and said the government may take steps to encourage lending to fund investments, exports and the agriculture industry if the U.S. crisis doesn't abate.

The yield on Brazil's zero-coupon bonds due in January 2010 jumped 32 basis points, or 0.32 percentage point, to 15.04 percent, according to Banco Votorantim. The yield on the overnight futures contract for January delivery rose 1 basis point to 14.02 percent.

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net