UPDATE 2-Brazil central bank chief warns of forex euphoria

Thu May 21, 2009 2:23pm EDT
By Isabel Versiani and Elzio Barreto
BRASILIA/SAO PAULO, May 21 (Reuters) - Brazil's central bank President Henrique Meirelles warned on Thursday against exaggerated swings in asset prices and "excessive euphoria" in the foreign exchange market, but the remark was not enough to prevent the local currency from extending a recent rally.
The Brazilian real BRBY initially weakened in the wake of Meirelles' comments but eventually reversed course and strengthened, propped up by a steady flow of dollars to the local market.
"Market participants, companies, in the past had significant losses because of excessive euphoria, because they bet on trends in an exaggerated way," Meirelles told reporters when questioned about dollar inflows to Brazil and recent gains in the currency.
The real was up 0.5 percent at 2.02 per dollar in afternoon trading, gaining for a fifth straight session.
Yields on interest rate futures contracts <0#dij:> rose after the comments, with the Jan. 2010 contract, among the most widely traded at the BM&F Bovespa, climbing to 9.30 percent from its 9.26 percent close on Wednesday.
Companies such as meat processor Sadia (SDIA4.SA), pulp producer Aracruz (ARCZ6.SA) and industrial conglomerate Votorantim lost billions of reais in wrong-way bets on currency derivatives in 2008.
The companies had bet Brazil's currency would hold firm after strengthening for several years. But the real plunged after the collapse of Lehman Brothers in September, creating massive losses on target rate forwards and other types of derivatives.
The real has gained 14.3 percent since the beginning of the year and surged nearly 20 percent since touching a three-month low in early March on rising dollar inflows from exporters and as investors flocked to local stocks and bonds.
Central bank data on Wednesday showed net inflows of U.S. dollars to Brazil totaled $2.06 billion this month through May 15. Net financial inflows rose to $1.4 billion in the period, compared with $1.05 billion inflows through May 8. Net inflows from trade transactions reached $658 million in the period, rising from the $108 million inflows the previous week.
The central bank has bought dollars on the spot foreign exchange market every session since May 8, when it intervened for the first time in eight months to soak up a flood of dollars to the country and slow the real's appreciation.
Foreign investors increased their net short positions on U.S. dollar futures at the BM&F Bovespa by more than five times to 55,716 contracts on May 20 from 10,412 at the beginning of the month. A short position on the dollar is a bet that the currency will weaken versus the real.
Meirelles sought to ease the appreciation of the currency with the comments and pare bets by overseas investors who borrowed at low interest rates abroad to buy Brazilian bonds, said Joao Medeiros, a partner at currency broker Pioneer.