UPDATE 2-Brazil's real has room to strengthen -c.bank director

Mon Dec 10, 2012 2:52pm EST

Related Topics

* Real trading below central bank's model

* Cenbank prepared to offer dollars to market

* FDI projected to reach over $66 bln in 2012

By Walter Brandimarte

RIO DE JANEIRO, Dec 10 (Reuters) - Brazil's central bank believes the real is slightly weaker than it should be and will continue to offer dollar liquidity to the foreign exchange market in case of shortage of the U.S. currency at year end, a top director with the bank said on Monday.

The real was trading around 2.08 per dollar when Aldo Mendes, the central bank's director of monetary policy, said the currency was slightly weaker than the level projected by a central bank model.

"There is a bit of fat there," Mendes told reporters when asked if the central bank was comfortable with the current exchange rate level. He was referring to the value of the dollar against the real, which reached a 3-1/2-year high of 2.1299 just 10 days ago.

Since then, a series of government actions that included direct interventions in the FX market and measures facilitating dollar inflows caused the real to strengthen about 2.5 percent.

The central bank is ready to provide liquidity through the sale of traditional currency swaps -- derivatives which emulate the sale of dollars in the futures market -- or through the direct sale of greenbacks on the spot market, Mendes told a gathering of business leaders in Rio de Janeiro.

His remarks slightly added to the real's gains on Monday. It closed at 2.0765, 0.7 percent stronger for the day.

Last week's actions to strengthen the currency confused many investors and economists who, after a series of comments by President Dilma Rousseff and Finance Minister Guido Mantega, had been led to believe the government wanted a weaker real to boost exports.

Mendes' remarks on Monday reinforced a market view that the central bank wants the real back within the narrow trading range of 2.0-2.1 per dollar it had been stuck since early July.

Mendes denied the existence of such a band, however, as he tried to assure business leaders that the government remains committed to key macroeconomic policies that are considered the basis for Brazil's economic stability over the past decade.

"The goal of seeking the midpoint of the inflation target range remains in place. The central bank doesn't have a target for the currency," he said.

An inflation-targeting regime along with a floating exchange rate and fiscal responsibility are considered the three pillars of Brazil's macroeconomic stability.

Despite expectations for a seasonal shortage of dollars at the end of the year, Mendes said foreign direct investment in Brazil will end this year at more than $66 billion.

The supply of dollars is often crimped in December as multinational companies and foreign investors send profit home to close annual accounts and Brazilian companies make year-end payments on debt.

The central bank had previously estimated $60 billion in foreign direct investment in Brazil this year.

FILED UNDER: