Brazil's central bank President Henrique Meirelles warned on Thursday against exaggerated swings in asset prices and "excessive euphoria" in the foreign exchange market, helping to reverse a recent rally in the country's currency. The real weakened 0.3 percent to 2.037 per dollar on Thursday, its first drop in four sessions. On Wednesday in intraday trade, it hit a seven-month high.
"Market participants, companies, in the past had significant losses because of excessive euphoria, because they bet on trends in an exaggerated way," Meirelles told reporters when questioned about dollar inflows to Brazil and recent gains in the currency.
Yields on interest rate futures contracts rose sharply after the comments, with the January 2010 contract, the most widely traded at the BM&F Bovespa, climbing to 9.31 percent from 9.26 percent close on Wednesday. Companies such as meat processor Sadia, pulp producer Aracruz and industrial conglomerate Votorantim lost billions of reais in wrong-way bets on currency derivatives in 2008.
The companies had bet Brazil's currency would hold firm after strengthening for several years. But the real plunged after the collapse of Lehman Brothers in September, creating massive losses on target rate forwards and other types of derivatives. The real has gained 14.3 percent since the beginning of the year and surged nearly 20 percent since touching a three-month low in early March on rising dollar inflows from exporters and as investors flocked to local stocks and bonds.
Central bank data on Wednesday showed net inflows of US dollars to Brazil totalled $2.06 billion this month through May 15. Net financial inflows rose to $1.4 billion in the period, compared with $1.05 billion inflows through May 8. Net inflows from trade transactions reached $658 million in the period, rising from the $108 million inflows the previous week.
The central bank has bought dollars on the spot foreign exchange market every session since May 8, when it intervened for the first time in eight months to soak up a flood of dollars to the country and slow the real's appreciation. Meirelles also said Brazil's economy, the largest in Latin America, has shown very clear signs of a recovery because on improvements in domestic demand.
"There are signs of a recovery in demand and that demand is being sustained, what's best, by a strong growth in employment and earnings the past years, by the increase in people's purchasing power," he said. Unemployment data released on Thursday showed Brazil's jobless rate fell for the first time in four months in April.
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