UPDATE 2-Brazil cenbank says ready to act if real weakens too much

Thu Nov 22, 2012 12:00pm EST

* Cbank chief Tombini says ready to increase supply of dollars

* Tombini says central bank has no official currency band

* Real gains, analysts divided on ceiling of FX band

By Tiago Pariz and Alonso Soto

BRASILIA, Nov 22 (Reuters) - Brazilian policymakers stand ready to protect the local currency from speculative bouts, central bank president Alexandre Tombini said on Thursday, signaling it will not allow the real to weaken too much, too fast.

In particular, he added, the central bank may "provide temporary liquidity" to the foreign exchange market at the end of the year, when demand for dollars often increases and supply falls -- weakening the real.

"That is a move that tends to revert itself right at the beginning of the (new) year," Tombini said at a congressional hearing.

Investors have dragged down the value of the real in the past two weeks, pushing it to the limit of what is considered an informal trading band of 2.0-2.10 per dollar, and testing the central bank's tolerance to a weaker currency.

Tombini vehemently denied that the central bank is working with a trading range, but vowed to defend the currency to keep forex markets working properly.

"We have no exchange rate target. We have a floating rate and we will always take steps to avoid Brasil becoming a market for devalued currencies competing against our currency," he said.

The real firmed 0.15 percent to 2.091 per dollar after Tombini's comments. It closed Wednesday at 2.0944, its weakest level in three-and-a-half years, after investors interpreted comments by President Dilma Rousseff as a signal that she was ready to loosen the band in which the real has been stuck since July.

Her comments, made in an interview to a local newspaper, were seen as suggesting the government could let the real weaken beyond 2.10 per dollar to help the local industry become more competitive.

Tombini's remarks, on the other hand, reminded investors that the central bank will continue to intervene in the market to avoid sharp currency moves.

"We have more comments from an important member of the government saying that forex policies have not changed: We still have a floating exchange rate with interventions," said Roberto Padovani, chief economist with Votorantim Corretora in Sao Paulo.

There was a divide among analysts over whether Tombini's comments meant the central bank will keep defending the level of 2.1 per dollar, as it has done in the past.

INFLATION VS ECONOMY

For over a year now, Rousseff has battled to prevent the real from appreciating, in an attempt to protect a local industry struggling with cheap imports from places like China.

Rousseff has blamed the strengthening of the real beyond its fundamentals on rich nations unleashing trillions of dollars into markets -- in what she dubs a global "currency tsunami".

Government interventions in the currency, which included raising taxes on foreign investors, have helped weaken and stabilize the real in a tight range of 2.0-2.1 per dollar in recent months.

However, at the current level, the real has yet to help the industry get out of its hole and bolster an economy that risks entering into a new era of mediocre growth.

Rousseff's administration believes a slightly weaker real could further help the economy regain growth rates above 4 percent that made Brazil a Wall Street favorite in past years.

Some economists worry that a weaker real could push inflation higher next year by increasing the price of imports.

Still, Tombini reiterated on Thursday that inflation was under control and that the monetary authority will remain vigilant on price rises.

The central bank is expected to end a year-long rate-cutting cycle when it meets on Nov. 28, leaving its benchmark Selic rate unchanged at its current record low of 7.25 percent.