Brazil to add reserves while liquidity high-cenbank

By Walter Brandimarte

NEW YORK, Feb 16 (Reuters) - Brazil's policy of building foreign reserves should continue as long as global imbalances support a steady flow of dollars into the country, central bank director Paulo Vieira da Cunha said on Friday.

"I don't think we will be building up reserves for 10 years ... but we are comfortable with our policy right now," Vieira da Cunha, who heads the international affairs department at the central bank, told analysts in New York.

He explained that Brazil, like many other countries, keeps intervening in the foreign exchange market to counteract the effect of "global imbalances" caused by a mismatch in world interest rates.

Low interest rates in the United States, Japan and Europe create carry trade opportunities, allowing investors to borrow in low-yielding currencies to invest in emerging countries like Brazil.

As a result, Brazilian foreign reserves hit an all-time high of $95.9 billion on Wednesday. They are expected to keep growing as the central bank continues to buy dollars on the foreign exchange market to dry up excess liquidity and, indirectly, prevent the currency from appreciating further.

Despite the central bank's efforts, the Brazilian real BRBY has been trading close to nine-month highs, raising complaints from the industrial sector.

The interventions are costly because the central bank has to offset them by selling bonds in the local market, in order to drain the excess of reais resulting from the buying of dollars.

But Vieira da Cunha said that "rather than looking at domestic issues," the central bank focuses on global liquidity conditions to decide whether to stop the currency interventions.

He acknowledged that one of the costs of the foreign exchange interventions is a delay in a planned reduction of the stock of Brazil's local floating-rate debt, or LFTs.

The Brazilian Treasury intends to cut as much as possible the share of public debt indexed to the country's base Selic rate. But the paper is the most efficient instrument the central bank has to offset the currency interventions, Vieira da Cunha said.

"The Treasury would have reduced its stock of LFT much faster if it did not agree with our policy of sterilized interventions, because it knows we need this kind of paper," he said.