Brazil Real Weakens Past 2-Per-Dollar for First Time Since May

From Bloomberg this morning:

Brazil Real Weakens Past 2-Per-Dollar for First Time Since May


Brazil's currency weakened past the 2.0-per-dollar level for the first time in three months as losses in global credit markets prompted investors to shun riskier emerging-market assets.

The real fell as much as 2.4 percent to 2.0325 reais to the dollar, the first time it breached 2.0 per dollar since May 15. It closed down 2.2 percent to 2.0295 per dollar, following a 2.2 percent slide yesterday. The central bank didn't buy dollars for a second day, after purchasing the U.S. currency in the spot market daily since July 2006.

``Volatility is at unimaginable levels now and nobody can clearly assess the damage caused by loses in credit markets,'' said Ronie Marcelo Germiniani, the proprietary trading manager at Banco Itau SA, Brazil's biggest non-government bank in terms of market value. ``Nobody is going to take significant positions in emerging markets under these circumstances.''

The real has weakened 7.8 percent this month, trimming its advance this year to 5 percent. Losses in the real deepened last week as central banks around the world started injecting cash into money markets last week to prevent losses related to the U.S. subprime rout from causing illiquidity.

The real also fell against the yen today as some investors pulled out of so-called carry trades in which they borrowed in yen and invested in Brazilian fixed-income assets. The real fell 2.7 percent to 57.2676 yen.

The central bank's purchases of dollars until recent days built up foreign reserves, which reached a record $160 billion in July.

As its foreign reserves increased, Brazil's holdings of Treasury securities increased $41.5 billion to a record $93.6 billion in the first half of 2007, Treasury data showed today. That left Brazil ranked fifth among international holders of U.S. debt in June, up from 10th at the end of 2006 and surpassing South Korea and Germany.

Dollar Purchases

Finance Minister Guido Mantega said yesterday the central bank deemed it unnecessary to buy dollars. ``The central bank isn't obliged to carry out dollar auctions every day,'' Mantega told reporters in Brasilia yesterday.

``There was some talk yesterday that the non-intervention was a sign the bank saw this crisis as really damaging, and was worried it may make things worse by buying dollars,'' Germiniani said. ``So the bank may act today just to show that their outlook is still for the real to appreciate because of strong investment flows.''

The real's recent declines will bolster profit margins at manufacturers, including textile and shoe makers, which have been squeezed in international export markets by the real's rally, said Pedro Bastos, chief executive officer for the Brazilian asset management unit of HSBC Holdings Plc.

``The weaker real gives those sectors a reason to celebrate now,'' Bastos said in an interview in Sao Paulo.

Retail Sales

A government report today showed Brazilian retail sales rose 11.8 percent in June from a year earlier. The increase in retail, supermarket and grocery store sales, as measured by units sold, was more than the 10.6 percent rise in May and higher than the median 11.3 percent rise forecast in a Bloomberg survey of 28 analysts. Retail sales increased a seasonally adjusted 0.4 percent in June from May and rose 8.2 percent in the 12 months through June.

The yield on Brazil's benchmark zero-coupon bonds due January 2008 rose 8 basis points, or 0.08 percentage point, to 11.27 percent, the biggest rise since the yield jumped 9 points to 11.14 percent on July 26, according to Banco UBS Pactual SA.