The Brazilian real slumped more than 2 percent a t one point o n Friday, causing the central bank to intervene in the foreign exchange market with a sale of currency swaps for the first time in nearly seven months. The real was weakening since the beginning of the session, despite an initial rebound in other Latin American currencies, as lingering European debt concerns and an unexpected decline in Brazil's economic activity sapped investors' appetite for risk.
--- Most Latam currencies weaken on Europe debt fears
The sell-off accelerated in the afternoon as US stocks turned red and Facebook Inc stumbled in its market debut. Other Latin American currencies also gave up gains, except the Mexican peso which remained slightly stronger. The Brazilian real closed 0.6 percent weaker at 2.0170 after the central bank sold all of the 13,000 currency swap contracts it had offered in an auction. The real had slipped to as much as 2.0570 per dollar, more than 2 percent weaker for the day, when the auction was announced.
"The central bank had to step into the market to stop the currency from weakening. The market was completely distorted, they acted to correct that," said Marcos Trabbold, a currency trader at B&T brokerage in Sao Paulo, referring to the volatility seen in the Brazilian currency on Friday.
The sale of dollar swaps has a market impact similar to the sale of dollars in the futures market. The last time the central bank resorted to this measure was on October 28. It had started using such swaps on September 22, when the real traded around 1.9 per greenback. All Latin American currencies finished the week with losses as concerns about Spanish banks and a possible Greek exit from the euro zone drove investors out of emerging markets over the past few days.
For the day, the Mexican peso rose 0.14 percent to 13.8189 per dollar. On the other hand, the Chilean peso weakened 0.28 percent to a fresh four-month low of 506.00 per dollar and the Colombian peso lost 0.93 percent to 1,823.00. The Peruvian sol ended practically flat at 2.6670 per dollar after the central bank intervened in the market for a second consecutive day with two repo operations worth $200 million each.
Also pressuring the Brazilian real, however, were expectations that interest rates would keep falling and that the government would allow for more currency depreciation after an index of economic activity fell for a third consecutive month. The central bank's IBC-Br economic activity index, a closely watched proxy for gross domestic product data, fell 0.35 percent in March from February, surprising analysts, who mostly expected it to rise 0.5 percent. The poor performance indicates the Brazilian economy will post a very weak first quarter despite a number of government measures to revive growth, including policies designed to weaken the currency.