The Brazilian real closed 2012 among the worst-performing world currencies as Latin America's largest economy delivered mediocre growth and policymakers intervened heavily to set an exchange rate more favourable to exporters. The real lost 8.6 percent this year, the third-worst performer after the Argentine peso and the Japanese yen, according to a ranking of the 36 most-traded currencies compiled by the Bank of International Settlements.
Friday was the last day of actual trading in 2012 for the real. But while the real weakened in 2012, most Latin American currencies strengthened. The Mexican peso and the Chilean peso are on track to finish the year with gains of more than 7.5 percent. The real ended at 2.044 per dollar, a level policymakers appear to be comfortable with because it is seen as making Brazilian exports more competitive abroad without adding excessive inflation pressures.
For 2013, most economists bet the real will remain within the range of 2.0-2.1 per dollar for many months as rising inflation pressures limit policymakers' ability to weaken the currency in order to stimulate local industry. While economists expect the Brazilian economy to grow only 1 percent this year, consumer inflation is seen at around 5.7 percent - above a government target of 4.5 percent, with a tolerance margin of 2 percentage points.
Despite persistent inflation pressures for 2013, economists also do not expect the central bank to allow the real to strengthen much as that would contradict government pledges to the industrial sector, including a statement by Finance Minister Guido Mantega, who said in November that a real weaker than 2 per dollar "is here to stay."
"A depreciated exchange rate is a necessary condition to a development project which puts more weight on local industry," said Pedro Rossi, a professor at the economics Institute of Unicamp University in Campinas, Brazil. "I don't believe Brazil will follow an export-led growth model, but in order to increase investment rates and stimulate the supply side, we need a slightly weaker exchange rate, or at least a currency not as strong as we had in the past," he added.
The real traded as strong as 1.7 per dollar at the end of February as investors expected cash injections by the European Central Bank that would come on top of the easy money policies of the US Federal Reserve, resulting in more dollar inflows to emerging markets. In an attempt to fight what Finance Minister Guido Mantega had called a "currency war," Brazil imposed a series of measures to curb dollar inflows, including a financial tax known as IOF on foreign purchases of bonds and stocks.
The measures, combined with another spike in global aversion to risk, weakened the real to as much as 2.1 per dollar by the end of June, prompting the central bank to intervene on the opposite direction to stop the currency from losing too much value. With all those interventions, policymakers ended up creating an informal trading band of 2.0-2.1 per dollar where the real has been trading since early July. At the end of November, the real briefly broke out of that range on bets the government would favour an even weaker currency to boost economic activity.
The expectation proved to be unfounded, at least in the short term, as policymakers quickly intervened to bring the currency back to the trading range, unwinding some of the measures imposed back in March, in a strategy that economists believe to be a strong signal of concern over next year's inflation.
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