RIO DE JANEIRO (Reuters) - Faced with the world's fastest-weakening currency, Brazilian policymakers have resorted so far to an unexpected strategy - quietly sitting on their hands.
The real
has weakened 13 percent so far in March, making it the worst performer among the 152 currencies tracked by Reuters.Other emerging market currencies have also been hit as investors have bought U.S. dollars, anticipating the Federal Reserve will soon start raising interest rates.Yet Brazil's real has suffered more than most, with investors spooked by the country's shrinking economy, large current account deficit and a corruption scandal shaking leftist President Dilma Rousseff's government.Instead of actively trying to manage the real's value, as Rousseff did during much of the first four years of her presidency, her government and Brazil's central bank appear to have decided a weaker currency will revive the economy, or that they are powerless to fight the market.Or, more than likely, both."The strategy is clear: They don't want an over-valued currency anymore," said Gustavo Rangel, chief Latin American economist with ING in New York. "Besides, there's not much more that the central bank can do."The central bank has been unusually quiet in recent weeks, with officials declining to discuss the currency even on condition of anonymity. A bank spokesman declined to comment on the institution's strategy.The bank's main strategy for managing the real's value in recent years has been selling currency swaps. Yet it signaled in late February that it would actually slow the roll-over of the swaps - which made the real weaken even further.Some analysts believe the bank could still change direction and try to support the real, especially if its decline gains pace. The real weakened as much as 3.7 percent on Friday to 3.28 per dollar, its weakest level since April 2003.The sudden plunge could further worsen inflation, which is already running at 7.7 percent a year - more than a percentage point above the central bank's target range."Too fast, too furious!" Goldman Sachs headlined a note on the real's decline on Friday morning. Yet, at least so far, officials' reaction has been calm - especially compared with peers like Turkey and Indonesia, whose weakening currencies have prompted political brawls and urgent Cabinet meetings. ROUSSEFF TAKES NEW TACKRousseff has tried to adopt a more laissez-faire philosophy in her second term, which started in January, to win back the confidence of investors who accused her of being too interventionist.Her new finance minister, Joaquim Levy, a University of Chicago graduate who is much more orthodox than his predecessor, said shortly after taking office in January that the government would not keep the real "artificially valued."Planning Minister Nelson Barbosa said on March 6 that the weaker real should help local industry become more competitive. Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management, said he expects the real to remain around 3.20 per dollar over the next six months before slowly recovering toward 3.0 per dollar.But risks of a much weaker currency abound, he warned, especially if Levy fails to push through planned budget cuts to close the fiscal deficit.Nonetheless, the central bank's ability to support the currency, even if it wanted to, has become more limited.The bank has already taken interest rates to a six-year high of 12.75 percent. Its currency swap program has become increasingly expensive - it cost 17 billion reais ($5.5 billion) in 2014, adding to Brazil's budget deficit.Most analysts see the bank extending the program later this month. However, they do not expect the swaps program to expand.Selling dollars from Brazil's international reserves is not advisable either as it could trigger a sovereign downgrade, cautioned ING's Rangel. "The sovereign is more vulnerable now," he said. (Editing by Brian Winter and Dan Grebler)
