Brazil's Real Weakens After Fed Rate Cut, Bear Stearns Collapse

By Adriana Brasileiro

March 17 (Bloomberg) -- Brazil's real fell as investors shunned higher-yielding securities after the Federal Reserve cut its discount interest rate in an emergency move and JPMorgan Chase & Co. agreed to purchase Bear Stearns Cos. for less than a tenth of its March 14 value.

``The crisis in the U.S. fell into a deeper, much scarier level over the weekend,'' said Francisco Carvalho, head of currency trading in Sao Paulo at Liquidez Corretora, the biggest currency derivatives brokerage in Brazil. ``Now we'll start to see more contagion in emerging markets.''

The real weakened 0.6 percent to 1.7226 per dollar at 3:55 p.m. New York time, after most trading in Brazil had ended. Global markets fell after the Fed made its first weekend change in borrowing costs since 1979 and Bear Stearns, the fifth largest securities firm in the U.S., was acquired for $2 a share. The real's losses today extend its decline over the past three days to 2.9 percent.

The real fell as much as 1.7 percent earlier today. Losses eased as traders stepped up bets the Fed will cut its target rate for overnight loans tomorrow to at least 2 percent from 3 percent. The move improves the yield advantage offered by local bonds and helps makes Brazil ``one of best risk-return options'' amid market turmoil, said Jose Guimaraes Monforte, chief executive at Pragma Gestao de Patrimonio, a Sao Paulo-based asset management firm.

``There's still ample liquidity in world markets and it needs to be invested somewhere,'' Monforte said. ``Brazil offers a strengthening currency, high interest rates, huge international reserves and assets that are still quite attractive.''

Brazil's economy hasn't been hurt by the deepening international credit squeeze, Finance Minister Guido Mantega said today.

``Brazil is a safe harbor,'' Mantega told reporters in Brasilia today. He expects the Fed to cut the benchmark interest rate by as much as 1 percentage point tomorrow to ``calm down'' markets.

Brazil-U.S. Spread

Brazil's 11.25 percent benchmark lending rate, while at a record low, is still 8.25 percentage points higher than the Fed's overnight target rate. The Fed this weekend cut its discount rate to banks by a quarter of a percentage point to 3.25 percent.

The real has gained 21.6 percent against the dollar over the past 12 months as rising commodity exports and purchases of local financial assets swelled dollar inflows. Exports rose to $3.5 billion in the week ended March 16 from $3.3 billion in the previous week, the government said today. The trade surplus in the week reached $527 million.

Economists in a weekly central bank survey revised up their year-end forecast for the real. The median forecast in the March 14 survey of about 100 economists was 1.75 per dollar at year- end, compared with a 1.78-per-dollar forecast the prior week.

Economists also raised their year-end inflation forecast to 4.44 percent from 4.42 percent, according to the survey.

The rising inflation forecast adds to speculation that the central bank will increase interest rates this year to rein in consumer demand, said Tony Volpon, chief economist at CM Capital Markets in Sao Paulo.

Rising Yields

The yield on the overnight interest-rate futures contract for January delivery held today 12.26 percent, more than 1 percentage point above the central bank's target rate. The yield has jumped 50 basis points, or 0.5 percentage point, this month.

Central bankers, in minutes of their March 4-5 policy meeting released on March 13, said rising food prices and the fastest economic expansion in more than three years boosted concern that inflation might overshoot their 4.5 percent target this year. The bank left the benchmark rate at 11.25 percent at the meeting for a fourth consecutive time.

The yield on Brazil's zero-coupon bond due in January 2009 rose 6 basis points, or 0.06 percentage point, today to 12.33 percent, according to Banco Votorantim SA.