(Bloomberg) -- Brazil’s real slumped to a new record low as the central bank’s latest intervention in currency markets failed to calm investor’s concerns and halt a selloff.
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The real weakened more than 1% to close at 6.1351 per dollar, according to data compiled to Bloomberg, just hours after the central bank sold $1.63 billion in the spot market. Swap rates surged and the benchmark Ibovespa stock index fell 0.9%.
The nation’s central bank has been pulling out all the stops, raising interest rates and now intervening directly in the market. But the measures are having limited impact as surging government expenditure pushes up inflation expectations. The budget deficit is currently running at about 10% of Brazil’s gross domestic product.
“The intervention should not change the trend, which continues to be driven by the strong global dollar and fiscal uncertainties,” said Ian Lima, money manager at Inter Asset.
The nation’s currency has been under growing pressure amid persistent concerns about the nation’s budget deficit, and is among the worst performers in emerging markets so far this year.
No Relief
The real took a step down late last month when the government’s much anticipated spending cut plan disappointed investors. And even as the currency weakens, markets look unlikely to get any relief from the government.
Finance Minister Fernando Haddad said Monday that the federal budget and the spending revisions will pass Congress before the year ends, damping speculation they would be delayed.
In a late Sunday TV interview, President Luiz Inacio Lula da Silva said the country’s interest rates are too high and blamed the central bank for the growing fiscal problems. He defended his government’s fiscal package and commitment to helping the poor, while also emphasizing the need for fiscal responsibility.
Policymakers will struggle to “stop the selloff in the local rates and currency markets, as actions and comments from the President undermine the credibility and room to maneuver of the BCB,” said Bernd Berg, a strategist at InTouch Capital.
Credit Line
The monetary authority also sold $3 billion in a credit-line sale on Monday. Through FX credit-line auctions, the central bank sells the so-called dollar spot and pledges to buy it back in the near future in exchange for a certain interest rate. Those moves try to supply liquidity to the spot market.