Brazil Real Falls on Concern U.S. Plan Won't Prevent Recession

By Adriana Brasileiro

Oct. 1 (Bloomberg) -- Brazil's real fell on concern a $700 billion U.S. bank-rescue plan won't be enough to prevent the global economy from slipping into a recession that will curb demand for Latin America's commodity exports.

The real dropped 0.8 percent to 1.9195 per dollar at 4:15 p.m. New York time, from 1.9046 yesterday. It earlier fell as much as 2 percent. The real was the worst performer among the 16 most-actively traded currencies last month, tumbling 14 percent.

``The foreign exchange market is really stressed,'' said Andre Schibuola, chief investment officer of Sao Paulo-based Precision Asset Management. ``There are a lot of outflows because people want to avoid risk.''

The U.S. Senate has set a vote for tonight on the financial- rescue plan, two days after the House of Representatives rejected a different version of the plan.

Demand for reais also waned after a report showed manufacturing in the U.S. fell to the lowest level since October 2001, signaling that the credit crunch is hurting the world's biggest economy.

The Institute for Supply Management's factory index dropped to 43.5, the Tempe, Arizona-based group said today. A reading below 50 indicates contraction.

The real may recover because Brazil still offers one of the best carry trade opportunities in the world, Citigroup Inc. said in a report today. In a carry trade, investors borrow in the currency of a nation where interest rates are low and use the proceeds to buy assets where interest rates and returns are higher. Brazil's benchmark overnight rate is 13.75 percent.

Yields on Brazilian zero-coupon bonds and interest-rate futures contracts fell after a private report showed consumer prices fell for a second month in September.

The Getulio Vargas Foundation's IPC-S index showed consumer prices in Brazil dropped 0.09 percent in September after falling 0.04 percent the previous month.

The yield on Brazil's zero-coupon bond due in January 2010 fell 5 basis points, or 0.05 percentage point, to 14.49 percent. The yield on Brazil's overnight futures contract for January 2009 delivery fell 3 basis points to 13.98 percent.

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