EMERGING MARKETS-Brazil real gains past 2/dlr, interest rate futures drop

Tue Jan 29, 2013 8:43am EST

* Real stronger than 2/dlr for 1st time in nearly 7 months
    * Central bank likely to tolerate stronger real due to
inflation
    * Brazil interest rates futures drop

    By Walter Brandimarte
    RIO DE JANEIRO, Jan 29 (Reuters) - The Brazilian real on
Tuesday strengthened past the 2-per-dollar mark for the first
time since July 2, crossing the threshold that for nearly seven
months had been considered a boundary of a trading band
informally set by policymakers.
    Gains were fueled by signs that inflation concerns are
starting to trample the government's goal to stimulate exports,
despite a November pledge by Finance Minister Guido Mantega that
a real weaker than 2 per dollar "was here to stay." 
    In recent months, the central bank had intervened in the
market to keep the real weaker than 2 per dollar. It initially
imposed an informal trading band of 2.0 to 2.1 per dollar, later
narrowing that range to 2.0 to 2.05 per dollar as inflation
pressures mounted.
    Analysts believe the central bank will now keep the real
around 2 per dollar, allowing it to further strengthen if needed
to curb inflation, as a stronger currency lessens the costs of
imported items in reais.
    "We think the real could go as low as 1.95 or 1.90 (per
dollar) with the central bank planning to use this FX
appreciation to control inflation expectations," Citibank
analysts wrote in a note to clients. 
    The real  last traded at 1.9879 per dollar, 0.7
percent stronger than Monday's close. It had rallied around 1.5
percent in the previous session as investors interpreted a
central bank decision to roll over traditional currency swaps as
a sign that the informal trading band was shifting. 
    Those contracts, which emulate the sale of dollars in the
futures market, were offered by the central bank when the real
was already strengthening, showing a green light to additional
currency gains. 
    Brazil's interest-rate futures fell as a stronger real
suggested the central bank is buying time before raising the
base Selic rate to fight inflation.
    The interest-rate contract maturing in Jan. 2014,
one of the most traded, dropped 5 basis points to 7.19 percent.

    Latin American FX prices at 1340 GMT:
 Currencies                         daily %    YTD %
                                     change   change
                            Latest           
 Brazil real                1.9870     0.68     2.67
                                             
 Mexico peso               12.7400     0.20     0.97
                                             
 Chile peso               473.1000    -0.02     1.18
                                             
 Colombia peso           1778.0000     0.10    -0.67
                                             
 Peru sol                   2.5600    -0.08    -0.35
                                             
 Argentina peso             4.9700     0.05    -1.16

 Argentina peso             7.6400    -0.26   -11.26
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