Brazilian Real Tumbles as Investors Flee High-Yielding Assets

By Jamie McGee

Oct. 22 (Bloomberg) -- Brazil's real tumbled more than 5 percent for a second consecutive day as investors fled higher- yielding assets amid concerns of a global recession.

Emerging-market bonds, currencies and stocks plunged from Brazil to Russia on speculation Argentina may default on its debt for the second time this decade.

``Equities have put downward pressure on emerging market currencies,'' said Omer Esiner, a senior market foreign-exchange analyst in Washington at Ruesch International Inc., a currency trading company. ``The uncertainty of the current situation prompts investors to seek more liquid, deeper capital markets like you have in the U.S.''

The currency dropped 5.9 percent to 2.379 per U.S. dollar at 5:08 p.m., from 2.2386 yesterday. Earlier, the real fell 6.6 percent, its biggest drop since Oct. 8. The real has dropped 20 percent this month, the third-worst performer among the 16 most- actively traded currencies, trailing only the South African rand and Mexican peso.

Banco Central do Brasil purchased an unspecified amount of reais today at a rate of 2.356 to the dollar. The central bank has sold $3.2 billion in foreign reserves to buy reais in the spot market and to support the real from Oct. 8 to Oct. 20, central bank President Henrique Meirelles said in testimony before congress yesterday. The central bank has also injected $71 billion in the banking system to help smaller lenders.

The central bank will offer 16,000 swap contracts tomorrow, according to a statement today.


Argentine Proposal

Brazilian President Luiz Inacio Lula da Silva authorized federally controlled banks to buy stakes in non-government financial institutions, in a decree published today.

Central bankers ``will not turn the trend,'' said Francisco Diez, director of emerging-market foreign exchange at RBC Capital Markets in New York. ``They will help mitigate it.''

Argentine President Cristina Fernandez de Kirchner's plan to take control of $29 billion of pension assets roiled markets because the last time the government seized savings was in 2001, before it defaulted on $95 billion of debt and triggered a global selloff. Brazil and Argentina are neighboring countries and trading partners.

The Standard & Poor's 500 Index declined 6.1 percent, while Brazil's Bovespa stock index tumbled 10.2 percent.

``It's already a delicate situation in South America,'' Diez said. ``To have further bad news in the region is not helping matters.''

In the first eight months of the year, Brazil advanced against 16 of the most actively traded currencies and traded at record high on Aug.1, at 1.56 per U.S. dollar, supported by record gains in commodity prices.

Repatriating Funds

``You tend to see big moves reverse themselves,'' Esiner said. ``Investors had poured money into these markets over the last couple of years. The credit crisis and the resulting spike in risk aversion has caused investors to repatriate those funds back home.''

The yield on Brazil's overnight futures contract for January 2009 delivery rose 30 basis points, or 0.3 percentage point, to 14.24 percent. The yield on the government's zero- coupon bonds due in January 2010 rose 152 basis points to 16.29 percent, according to Banco Votorantim.

To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net