Brazil's Real Falls as Risk Aversion Outweighs Dollar Sales

By Adriana Brasileiro

Oct. 10 (Bloomberg) -- Brazil's real fell after the central bank sold dollars in the local spot market for a third consecutive day in an effort to reduce losses in the real that amount to 17.7 percent this month.

The real declined 1.3 percent to 2.3130 per dollar at 4:51 p.m. New York time. The central bank sold dollars three times today.

``The central bank moves have eased some of the tension, but people are still scared to step back into our markets,'' said Andre Delben Silva, who helps manage about 620 million reais ($268 million) at Advisor Asset Management in Sao Paulo.

The central bank on Oct. 8 stepped up measures to stem the real's decline by drawing on its record $208 billion of international reserves to sell dollars in the spot market. The auction, the first in five years, came after sales of currency swap contracts since Sept. 19 failed to prop up the real.

Brazilian policy makers said today there are no ``fixed limits'' to the size of the bank's operations in the foreign- exchange market or in money markets for authorities to buy loans.

``The central bank is committed to the good functioning of markets,'' according to an e-mailed statement.

In Mexico, the central bank sold a record $6.4 billion in the foreign exchange market today. Dollar sales by Mexican authorities totaled $8.9 billion in the past three days.

`Some Overshooting'


The unwinding of so-called carry trade positions has exacerbated losses in the real, Marcos Mollica, a currency strategist for Latin America at UBS Pactual in Sao Paulo, said in a conference call yesterday. In carry trades, investors borrow in the currency of a nation where interest rates are low, such as Japan, and use the proceeds to buy assets where interest rates and returns are higher. Brazil's benchmark overnight rate is 13.75 percent.

``There's been some overshooting in the real, and one of the factors is the unwinding of investments in emerging markets,'' Mollica said in the call with investors.

The yen rose against the euro and headed for its biggest weekly gain in a decade against the dollar as a global stock rout prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan.

The real's weakness has started to hurt retailers in Brazil. Supermarkets and food stores have temporarily suspended purchases of imported goods because of the country's falling real, Folha de S. Paulo reported today.

Supermarket chains are negotiating new prices with distributors, Folha said, citing Sussumu Honda, president of the Brazilian Association of Supermarkets.

Additional Powers

The yield on Brazil's overnight futures contract for January 2010 delivery rose 23 basis points, or 0.23 percentage point, to 14.99 percent. The yield on Brazil's zero-coupon bond due in January 2010 gained 15 basis points to 15.05 percent, according to Banco Votorantim.

In another measure, Brazil's monetary council yesterday gave the central bank additional power to participate in the management of banks that may be in trouble.

The central bank will be able to demand that controlling shareholders inject cash into an institution and that they sell assets, according to a statement. Authorities may also block executive salary increases and limit the operations of a bank.

When central bank President Henrique Meirelles announced the measure, he said it was preventive because no banks were in trouble in Brazil.

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