Brazil currency to lose some steam in 2008

The flood of US dollars to Brazil should slow in 2008, creating greater volatility in the exchange rate and slowing the appreciation of the real, analysts said. Brazil's currency gained 20 percent in 2007 because of a record $90 billion of net dollar inflows to the country, more than double the previous record of $37 billion in 2006.
The real, which closed at 2.136 per dollar in 2006, rose to 1.783 per dollar on Wednesday. At the beginning of 2007, analysts projected the currency would end the year at 2.2 per dollar. Now, analysts project 2008 could be a turning point. The central bank forecasts the country will post its first current account deficit in six years in 2008. Dollar flows to Brazil, Latin America's largest economy, will be affected by uncertainties over a global credit crunch and the possibility of a recession in the United States, they say.
"Given the deterioration of the balance of payments and greater risk aversion in international markets, we will have a less favourable market for the exchange rate," said Jankiel Santos, an economist at ABN Amro in Sao Paulo.
The expected current account deficit may take some shine off the real but financial flows, including foreign direct investment and stock market transactions, are expected to remain positive, economists said. Despite net dollar inflows falling to $35 billion in 2008, the real may trade as strong as 1.6 per dollar next year, forecast Roberto Padovani, chief Brazil economist at WestLB in Sao Paulo.
Brazil's high domestic interest rates should continue to attract short-term investments to local bonds, helping stem a possible slide in the real. A smaller but strong trade surplus may also keep the real from losing more ground, while growing investor sentiment against the US dollar in global markets would bolster the Brazilian currency.
Bets against the US currency around the world are so strong that UBS Pactual said in a report "at the moment, short positions against the dollar are the most sought-after (investments) in the world." "(The year) should have a lot of a volatility, mainly at the beginning, but on average we see some gains in 2008" for the real, Padovani said.