Brazil real surges, stocks edge up before holiday

(Updates to close)

SAO PAULO Dec 23 (Reuters) - Brazil's currency posted its biggest gain in three weeks on Wednesday, buoyed by strong dollar inflows, while stocks crept higher in light trade ahead of the Christmas holiday.

The real BRBY strengthened for the second day in a row, surging 1.4 percent to 1.757 per dollar, its largest one-day gain since Dec. 2.

Traders said the currency was propped up by strong dollar inflows into the country, a trend that has helped make the real the world's best performing major currency this year against the dollar.

Brazil's central bank said on Wednesday that dollar inflows into Latin America's largest economy totaled $1.565 billion so far this month through Dec. 18. [ID:nSAQ002380]

The bank has sought to soak up some of those inflows by regularly intervening to buy dollars on the spot foreign exchange market, something it did again on Wednesday.

In the first 18 days of December, the bank bought $2.677 billion on the spot market. That brought total dollar purchases by the bank to about $26.67 billion since May 8, when it began intervening to boost international reserves and reduce volatility in the currency market.

The benchmark Bovespa stock index .BVSP edged up 0.25 percent to 67,588.86 points, propped up by state oil company Petrobras, mining giant Vale and airline TAM Linhas Aereas.

Petrobras (PETR4.SA), the heaviest weighted stock in the Bovespa index, firmed 0.99 percent to 36.70 reais while voting shares of Vale (VALE3.SA), another blue chip, gained 0.24 percent to 42.16 reais.

Vale's chief executive, Roger Agnelli, told reporters in Sao Paulo on Wednesday that the company expects iron ore production to rise to around 300 million tonnes in 2010 as the global economy recovers. [ID:nN23161652]

Shares in TAM (TAMM4.SA), Brazil's leading airline by market share, jumped 6.69 percent to 38.09 reais, recovering from a recent sell-off sparked by its surprise acquisition of smaller rival Pantanal. [ID:nN21237466]

Yields on interest on most interest rate future contracts <0#DIJ:> rose, reflecting the view that borrowing costs in Brazil are likely to rise at some point in 2010 to prevent a pick-up in inflation.

The yield on the Jan. 2011 DIJF1 contract jumped to 10.42 percent from 10.36 percent on Tuesday, while the Jan. 2012 contract DIJF2 rose to 11.82 percent.

Investors use the contracts as a way to bet on the trajectory of the central bank's benchmark Selic lending rate.

Brazil's stock market will be closed on Thursday and Friday for the Christmas holiday. The currency market will close early on Thursday at noon local time (1400 GMT) and will be closed on Friday.

Both markets will reopen at normal trading hours on Monday. (Reporting by Silvio Cascione and Todd Benson; Editing by Diane Craft)