UPDATE 1-Brazil may allow real to gain past 1.95/dlr-source

Thu Feb 14, 2013 4:34pm EST

* Real could strengthen as long as movement is gradual

* Investors expected Brazil to stop real from gaining past 1.95/dlr

* Stronger real helps, or doesn't hurt, fight against inflation

By Patricia Duarte

SAO PAULO, Feb 14 (Reuters) - Brazilian policymakers are more worried about curbing volatility in the foreign exchange market rather than setting a trading range for the real, a source on President Dilma Rousseff's economic team said on Thursday.

The source, who spoke on condition of anonymity, signaled that the real could strengthen past the level of 1.95 per dollar - considered by many investors as the lower limit of a new trading band imposed by the central bank - as long as the appreciation is gradual.

The real gained 0.3 percent on Thursday to 1.9575 per dollar, its strongest level in nine months, as investors tested what many analysts believe to be the lower limit of a new informal trading band of 1.95 to around 2 reais per dollar.

The boundaries of that trading range appeared to have been set by a series of recent central bank interventions, including a Friday sale of reverse currency swaps - derivative contracts designed to weaken the currency that were offered when the real neared the mark of 1.95 per dollar.

Asked whether the government was using the exchange rate to cheapen the price of imported goods and help curb inflation, the source answered that a "stronger real tends to help (the fight against inflation), or at least it doesn't hurt."

The source reaffirmed the government's long-standing position that there is no official trading band for the real. At the same time, the source said policymakers foresee the exchange rate to remain more stable in 2013 than last year.

Between March and November of 2012, the real weakened as much as 20 percent against the U.S. dollar - a move that was initially encouraged by the government to stimulate exports but that ended up adding to inflation.

"The impact (on prices) is more limited when exchange rate variations are gradual," noted the source.

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