Brazilian Real Advances to Highest Since May 1999 on Rate Gap

By Guillermo Parra-Bernal
March 6 (Bloomberg) -- Brazil's real climbed to its highest since May 1999 after the central bank yesterday left its benchmark interest rate at 11.25 percent, maintaining the yield advantage of the nation's fixed-income securities.
Banco Central do Brasil left its benchmark overnight rate unchanged for a fourth straight month, as forecast by all 35 economists in a Bloomberg survey. Policy makers said they would keep monitoring inflation before their April 15-16 meeting, leading some traders to bet that they will raise the benchmark rate in the second half of the year unless inflation slows.
``It's hard to see changes in the local interest-rate scenario in the short run,'' said Ronie Marcelo Germiniani, the proprietary trading manager at Banco Itau Holding Financeira SA, Brazil's biggest non-government bank in terms of market value. Maintenance or an increase in the rate ``should very much work in favor of the real because the yield differential plays a role in attracting some of the investment funds into Brazil.''
The real reached 1.6592 per dollar, the strongest since May 19, 1999, and traded at 1.6649 per dollar at 10:44 a.m. New York time. The currency has climbed 6.9 percent this year, the fourth- most among the 16 most-traded currencies.
Annual inflation in Brazil has quickened from an eight-year low of 2.96 percent last March to 4.74 percent through mid- February. Since January, the 12-month inflation rate has exceeded the mid-point of the central bank's target of 4.5 percent plus or minus 2 percentage points.
Fed Rate Cuts
Interest-rate cuts by the U.S. Federal Reserve have boosted the yield advantage on Brazilian fixed-income securities, luring investment flows to local markets and buoying the currency. Brazil's main rate is 8.25 percentage points above the 3 percent benchmark U.S. rate.
The yield on the interbank deposits future rate contract due in January 2009, the most actively traded contract of its kind on Brazil's Commodities and Futures Exchange, rose 4 basis points to 11.76 percent today. The yield is 51 basis points above the central bank's benchmark overnight rate. One basis point equals 0.01 percentage point.
The real may gain to as high as 1.63 to the dollar within the next three weeks as a global rout of the dollar boosts the attractiveness of currencies offering high returns and almost investment-grade risk to investors, said Italo Lombardi, a strategist at research company IDEAglobal in New York.
Brazil's benchmark lending rates, among the highest in emerging markets, are prompting investors to buy government bonds with money financed by loans in countries where interest rates are low, such as Japan, Lombardi said.
The dollar touched a record low of $1.5347 per euro today, the weakest since the European currency's debut in 1999, After European Central Bank President Jean-Claude Trichet said there is ``strong upward pressure on inflation,'' signaling he's in no hurry to cut interest rates.
Brazil's central bank bought dollars for reais at a rate of 1.6665 per dollar at an auction today, part of a policy to bolster international reserves and temper the currency's rally.