Brazil's Real Weakens as Global Investors Unwind Carry Trades

By Jamie McGee

Oct. 21 (Bloomberg) -- Brazil's real weakened for the first time in four days as investors pulled money from higher-yielding assets on concern that slowing global growth may prompt central banks to reduce interest rates in the U.S. and Europe.

The real dropped 2.9 percent to 2.1815 per U.S. dollar at 10:23 a.m., from 2.1182 yesterday.

The selling is ``a flight to quality,'' said Bartosz Pawlowski, a strategist at TD Securities Ltd. in London. ``All the carry trades are being unwound.''

Brazil and other Latin American countries are better protected than other emerging markets because of central bank interventions, Pawlowski said.

The real has fallen 13 percent this month, after advancing against all 16 of the most actively traded currencies in the first eight months of the year. The real has weakened against 13 of those currencies in the last month.

Brazil's central bank agreed to lend $1.62 billion of its foreign reserves to local banks to aid finance exporters. The bank sold dollars in the spot market and sold 16,000 currency swap contracts at an auction yesterday. In a statement yesterday, the bank said it plans to sell 10,000 currency swap contracts today.

The yield on the government's zero-coupon bonds due in January 2010 fell 6 basis points, or 0.06 percentage point, to 14.7 percent, according to Banco Votorantim.

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