Brazil's real slumped to an eight-week low on Friday on expectations of more big interest rate cuts and new intervention measures by authorities worried that a strong currency is crimping growth. The real slumped by the most this week since the beginning of November when it was hit by panic about European banks, shedding 3.3 percent against the dollar and leading losses in March for the 152 currencies tracked by Reuters.
Speculation that Brazil's sovereign wealth fund could soon start to buy dollars in the market spurred selling. Authorities have deployed a growing tool chest of measures designed to sap the real's strength, which is hurting local industry. Still, analysts said global demand for higher-yielding assets would likely cap losses ahead in the real, which could soon begin appreciating again.
A recent liquidity boost of more than half a trillion euros from the European Central Bank is expected to keep driving financial flows into emerging markets offering higher yields, such as Latin America, in the coming weeks. Europe's cheap financing adds to the global pool of money available at low-interest rates that can be invested in emerging markets.
"All this liquidity is the global force that authorities in Brazil are fighting," said Roberto Melzi, a strategist at Barclays Capital in New York. "The global forces suggest the real could still rally a lot. But all these measures by authorities could make it underperform the rally we are likely to see if money keeps pouring into emerging markets," Melzi said.
On Friday, the real sank 1.29 percent to 1.7835 to the dollar, paring losses that had taken it to its weakest level since mid-January. Data on Friday showed inflation in Brazil eased in February to its slowest pace for that month in five years, reinforcing the central bank's argument for increasingly aggressive interest rate cuts. Lower rates could make investing in Brazilian bonds less attractive.
Late Wednesday, Brazil's central bank surprised analysts by cutting its benchmark interest rate three-quarters of a percentage point to 9.75 percent. After the cut, the median of a Reuters poll showed analysts see the rate falling to 8.5 percent this year, versus a previous floor of 9.5 percent. Enrique Alvarez, an analyst at IDEAglobal in New York, expects the real to finish the year at about 1.70 to 1.75 to the dollar.
Other major Latin American currencies rose after the US government reported that US employers added more than 200,000 jobs for a third straight month, a sign the world's largest economy was strengthening. Mexico sends nearly 80 percent of its exports to the United States. Mexico's peso gained 0.34 percent to 12.6625 to the dollar for a third day. Earlier it reached 12.6010, its strongest in six months, before pulling back.
Rafael Camarena, an economist at Santander in Mexico City, expects the peso to trade laterally between 12.70 and 12.60 per dollar over the next week as investors look for further confirmation that the US economy is improving. Chile's peso firmed about 0.25 percent to 483.00 to the dollar from 484.40.