Brazil's real rose on Friday as persistent central bank intervention failed to fully absorb dollar inflows, while the country's interest-rate futures rose sharply after a survey suggested the economy needed tighter-than-expected monetary policy to grow without inflation.
Most Latin American currencies were supported by commodity gains, with expectations of higher interest rates further boosting the Colombian peso. However, worries about the euro-zone crisis weighed on the Mexican currency. The Brazilian real trimmed some of its earlier gains but still traded 0.3 percent higher at 1.705 per dollar after two dollar-buying auctions launched by the central bank less than one hour apart.
The bank's action came one day after it offered to sell reverse currency swaps for the first time since August and also bought dollars in the spot market. The real has gained more than 9 percent so far this year and the central bank's interventions in the foreign exchange market added to the perception that the government is drawing a line at 1.7 reais per dollar.
At Friday's auctions, the central bank initially bought dollars at a cutoff price 1.7059 reais, and then at 1.7057 reais. Concerns about the pace of monetary policy easing in Brazil increased after the central bank released a survey showing economists estimate the economy can grow without inflationary pressures if real interest rates are about 5.5 percent - higher than the 4.5-5.0 percent expected by many traders.
Brazil's benchmark interest rate is now at 10.5 percent, after four, half-percentage-point rate cuts since August. Inflation for the 12 months ending January 31 was 6.22 percent, giving Brazil a real interest rate of about 4.3 percent, more than a percentage point below the neutral rate survey estimate. "There is this feeling that the central bank might be exaggerating and, just to be sure, markets raised the rates," said a trader in Sao Paulo.
Brazil's interest-rate contract for January 2013 rose to 9.270 percent from 9.220 percent in Thursday's adjusted close. The contract for January 2014 jumped to 9.750 percent from 9.670 percent. Strong dollar inflows have provided powerful tailwinds to Latin American currencies this year, and analysts expect that trend to intensify as commodity prices rise and the European Central Bank floods the markets again with cheap money next week.
The Chilean peso rose as much as 0.7 percent during the session before ending broadly flat against the dollar, at 480.30 per dollar, as local dollar purchases offset a jump in prices of copper, the country's main export. The Colombian peso gained 0.2 percent to 1,773.05 per greenback. Boosting the prospects for the Colombian currency, the country's central bank will likely increase the key interest rate for a second straight month at its meeting on Friday, in an attempt to ease economic growth and cool the pace of bank lending. In Mexico, however, the peso weakened 0.4 percent to 12.876 per dollar. The currency has been unable to break past 12.65 per dollar, trading in a narrow range this week on persistent concerns over the future of the euro zone debt crisis.
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