(Corrects 16th paragraph to say reverse swap auction mimics
central bank purchase of dollars, not sale of dollars)
* Real initially rallies as government seen favoring strong
* Central bank intervenes to halt currency gains
* Mantega suggests government willing to accept stronger
* Analysts see new trading band of 1.95-2.05 per dollar
By Walter Brandimarte
RIO DE JANEIRO, Feb 8 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
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
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
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
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
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,"
(Additional reporting by Natalia Cacioli in Sao Paulo, Alonso
Soto in Brasilia; editing by Phil Berlowitz, Dan Grebler, Jeb