The Brazilian real led Latin American currencies lower on Friday, hitting its weakest level in over four months, as concerns about the euro zone crisis and the looming US "fiscal cliff" drove investors to the perceived safety of the dollar. The real lost as much as 1.4 percent in the morning, a remarkable change for a currency that has barely moved in the past several weeks, while the Mexican peso dropped as much as 0.9 percent.
Both currencies trimmed losses later, but remained on track to close the week with declines of about 1 percent. "This has been a very crowded week, from the US elections to Greece. That's why investors are taking more defensive positions," said Andre Perfeito, chief economist at Gradual Investimentos, a money manager in Sao Paulo.
Investors are particularly concerned about the tough task ahead for US President Barack Obama of ensuring that Congress reaches a deal to avoid the automatic spending cuts and tax increases worth about $600 billion that kick in early next year. Failure to reach an agreement could plunge the world's largest economy into another recession. As the fiscal debate heats up in Washington, investors expect risk aversion to grow further by the end of the year, weighing on Latin American currencies.
In Brazil, the real last traded 0.6 percent weaker at 2.0503 per dollar. Earlier, it had weakened to as much as 2.0671, raising questions as to whether the central bank could intervene to curb currency losses. With a series of interventions in the foreign exchange market, Brazilian policymakers have imposed an informal currency trading range of 2.0 to 2.1 reais per dollar - a level the government seems to consider right to support exporters without stoking inflation. But lingering concerns about Brazil's fragile economic recovery and signs that inflation has started to ease could make policymakers comfortable with a weaker real to benefit the local industry, analysts said.
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