RIO DE JANEIRO Brazil's central bank intervened to halt a currency rally on Friday, setting the boundaries of a new informal trading band that government officials hope will help curb inflation without hurting exporters.
The intervention followed a week of intense volatility in the currency market as investors scrambled to figure out how policymakers were adjusting Brazil's foreign exchange policy. The real, which stabilized and closed the week at 1.9715 per dollar, is now likely to enter the traditional Carnival lull that will halt Brazilian markets for most of next week.
The real was rallying for a second day early on Friday after comments by a number of policymakers, including Finance Minister Guido Mantega, suggested the government was ready to accept a stronger currency to cheapen the price of imported goods and put a lid on inflation.
In an interview with Reuters on Thursday night, Mantega said the real, which last week gained past the level of 2 per dollar for the first time in seven months, "has found a reasonable floating band.
The minister, who has always defended a weaker real to support exporters, sounded more amenable to a stronger currency as he cited the 1.85-per-dollar threshold as an example of a level that would not be allowed.
His remark came shortly after central bank chief Alexandre Tombini told a Brazilian newspaper that he was worried about rising consumer prices in the short term, comments that many interpreted as a sign the central bank was favoring a stronger real to curb inflation.
In the interview, Mantega sounded less concerned about inflation than Tombini, but the two appeared to be converging on currency policy. Economists say the central bank favors a slightly stronger real to help slow inflation, whereas finance ministry officials have argued that a firmer currency could spur investment by making it cheaper for companies to import capital goods and machinery.
Just last week, Mantega and Tombini appeared to be on a collision course when the central bank intervened in the opposite direction to halt a currency sell-off, also triggered by Mantega.
Taken together, Mantega's and Tombini's now converging comments were interpreted as a green light for a stronger real, driving the currency more than 1 percent higher in early trading on Friday.
The real had already gained about 0.8 percent on Thursday on growing speculation that the government would use the exchange rate to curb inflation, which is dangerously close to the ceiling of a government target.
Brazil's currency had lost nearly 30 percent against the dollar between July 2011 and last November, but gained about 8 percent since then.
Signs that the government was not happy about the speed of appreciation of the real in the past couple of days were already evident early on Friday, when a source on President Dilma Rousseff's economic team told Reuters gains had been "somewhat exaggerated.
After piercing the level of 2 per dollar last week, market analysts estimated the real's informal trading range, which for months was set at 2.0 to 2.1 per dollar, was shifting to around 1.95 to 2.05.
Investors, eager to test that theory, pushed the real to a nine-month high of 1.9510 per dollar on Friday morning.
That was when the central bank intervened, offering to sell as much as 30,000 reverse currency swaps - derivative contracts that emulate the purchase of dollars in the futures market and are often used by policymakers to weaken the real.
"They seem to be doing two things: one is to try to slow down the appreciation of the real, but they also seem to be putting a boundary for the real at 1.95 per dollar, at least for now," said Enrique Alvarez, chief of Latin America research at IDEAglobal in New York.
Further adding to the notion of a new trading band around the level of 2 per dollar, Development Minister Fernando Pimentel told Valor Economico newspaper that a real between 1.96 and 2.05 per dollar would be acceptable to industry.
Some analysts wondered whether the government was clumsily trying to stem currency volatility, a factor that some economists say muddies Brazil's investment climate.
"While investors may be skeptical about Brazil's intentions near term, a solid and ongoing commitment to a stable real, instead of a weaker real, may end up marking its return to being a favored emerging market trade," Brown Brothers Harriman's analysts said in a research note.
"We're not there yet, not with all these policy flip-flops," they added.
(Additional reporting by Natalia Cacioli in Sao Paulo, Alonso Soto in Brasilia; editing by Phil Berlowitz, Dan Grebler, Jeb Blount)