Brazil, Mexico Pump Dollars Into Market to Stem Currency Routs

By Michael J. Moore and Adriana Brasileiro

Oct. 8 (Bloomberg) -- Brazil sold dollars for the first time in five years and Mexico offered $2.5 billion in a bid to shore up currencies that have been ravaged by the worst financial crisis since the Great Depression.

Central bankers stepped into the foreign exchange market after Mexico's peso tumbled as much as 13.8 percent, its biggest intraday drop since a government devaluation in 1994, and Brazil's real sank as much as 9.4 percent to a three-year low. Both currencies pared losses after policy makers announced the dollar sale plans.

Central banks ``are doing anything and everything they can to bring stability to the market,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York.

The peso close little changed at 12.3225 per dollar after earlier touching a record low of 14.2927. The peso has sunk 20 percent from a six-year high reached Aug. 4. The real fell 1 percent to 2.3342 per dollar, extending its decline this month to 18.4 percent.

Policy makers in Latin America's two biggest economies ratcheted up efforts to buoy their currencies hours after central banks in the U.S., Canada and Europe cut interest rates as part of an effort to unfreeze credit markets. The financial crisis has roiled markets across Latin America as concern has mounted that a recession in the U.S. will erode demand for the region's commodity exports and curb investment flows.

`Deep, Prolonged Recession'

``We're looking at a deep, prolonged recession in the U.S.,'' said Marc Chandler, head of currency strategy with Brown Brothers Harriman & Co. in New York.

Brazil's central bank sold dollars three times today, tapping into a record $207 billion of foreign reserves. Today's move differs from auctions held in recent days because those sales included an agreement for the central bank to repurchase the dollars at a future date. A central bank spokeswoman declined to say how much the bank sold today.

``People were asking for this dollar sale and that's exactly what the central bank has to do at a time of extreme panic like this,'' said Luiz Adriano Martinez, a portfolio manager who helps manage 45 billion reais at Unibanco Asset Management in Sao Paulo.

The real's 9.4 percent plunge earlier today followed declines of 5.7 percent yesterday and 6.2 percent two days ago. That two-day slide was the biggest since January 1999, when the central bank abandoned a currency peg after burning through more than $30 billion of foreign reserves in nine months.

`Bold Step'

The real's 18.4 percent loss this month makes it the worst performer among all currencies tracked by Bloomberg, excluding the Zimbabwean dollar. The real has sunk 33 percent from a nine- year high reached on Aug. 1.

Mexico's central bank sold $998 million of the $2.5 billion it offered today. It was the biggest intervention since the bank sold $2.8 billion in a day in September 1998, when Russia's debt default prompted investors to pull their money from emerging markets.

Banco de Mexico plans to offer another $1.5 billion tomorrow and will sell an additional $400 million in following days when the peso's decline is more than 2 percent. The peso soared after the announcement as analysts had called on the bank to enter the market and stem the slide.

``Mexico needed this bold step,'' said Gabriel Casillas, an economist at Banco UBS Pactual in Mexico City. ``That's what the market is saying right now, and I think it's going to be very favorable for the peso and for market conditions in Mexico.''

`Tequila Crisis'

The central bank's $84.1 billion of foreign reserves are near a record high as a six-year rally in oil, the country's biggest export, swelled dollar inflows.

``We have very good levels of reserves,'' Casillas said. ``I don't even think the markets will notice if the level of reserves comes down.''

The 13.8 percent decline earlier today was the biggest intraday drop since December 1994, when President Ernesto Zedillo was forced to abandon a currency peg to avoid depleting the country's reserves. The peso plunged 45 percent over the next six weeks, sparking capital outflows throughout the region in what became known as the ``Tequila Crisis.''

Mexican President Felipe Calderon is preparing an economic package with the Finance Ministry to soften the impact of the credit crisis in Latin America's second-biggest economy, central bank Governor Guillermo Ortiz said yesterday in an interview on Radio Formula. Ortiz didn't provide specifics of the plan.

Zero Growth

Economists are cutting their growth forecasts for Mexico -- and the rest of Latin America -- as the U.S. slows and commodities such as oil and copper sink from record highs. The U.S. buys about 80 percent of Mexican exports. The average forecast for Mexican growth in 2009 fell to 2.5 percent from 2.9 percent, according to a central bank monthly survey of 33 analysts released Oct. 1.

Morgan Stanley said Oct. 5 that it forecasts zero growth in Mexico and 1.5 percent in the region next year. The bank had previously been forecasting a 3 percent expansion in Mexico and 3.5 percent growth for the whole region.

Mexican Deputy Finance Minister Jose Antonio Meade Kuribrena said yesterday that the ministry will revise its 3 percent growth forecast in its 2009 budget proposal. The economy expanded more than 2.5 percent in the first half of this year after growing 3.2 percent in 2007.

Brazil and Mexico join Argentina and Peru in selling dollars. In Chile and Colombia, central bankers have suspended daily dollar purchase programs in the past two weeks to ease their currencies' declines. Chile's peso still fell 3.2 percent today, the biggest drop since 1992.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net