UPDATE 1-Brazil to use capital flows for FX reserves-cenbanker
* Brazil to use capital inflows to build up FX reserves
* Dollar adjustment effects felt unevenly by countries
* G20 to discuss FX regimes, exit strategies (Adds details, background)
LONDON, Nov 5 (Reuters) - Brazil will use capital inflows into the country to build up its foreign reserves, continuing to buy dollars to smooth over any price distortions arising from the liquidity influx, the head of the country's central bank said on Thursday.
Henrique Meirelles also said there would be some discussion among finance ministers at the upcoming Group of 20 (G20) meeting on how the effects of the weakening dollar arising from the global rebalancing were being felt unevenly among countries.
In a Reuters interview ahead of the G20 meeting on Friday and Saturday, Meirelles said the strong inflows into Brazil were not only a consequence of the liquidity pumped into leading economies such as the United States to combat the global downturn, but also due to Brazil's strong economic fundamentals.
"We will take advantage of the net inflows for Brazil to build reserves and to strengthen the resilience of the Brazilian economy," Meirelles said.
"But we take into consideration policy...also to avoid price distortion in the market as a result of lack of, or excessive, liquidity."
In October Brazil saw its greatest dollar inflows in over two years -- about $14.6 billion. The central bank also bought $6.7 billion on the spot market, almost double September levels.
Early last month, Brazil slapped a tax of two percent on foreign investments in fixed income and stocks in a bid to halt massive dollar inflows that have fuelled a stock market .BVSP surge and pushed Brazil's real currency (BRBY) 34 percent higher against the greenback this year.
The rapid rise of the currency is seen threatening Brazilian exporters, with one government official saying the real was around 20 percent above a "neutral level" that would neither stimulate nor hinder economic growth. For full story, see [ID:nN0424883]
Meirelles declined comment on currency levels and the recent capital tax but insisted Brazil was not adopting capital controls.
UNEVEN EFFECTS
He said the central bank was working on an overhaul of currency laws which had been set up in the 1930s.
"The aim is to keep building a system which is more efficient, less costly and one of our objectives is to avoid the price distortions in the market," he said.
Echoing comments made earlier to Reuters by Brazilian Finance Minister Guido Mantega, Meirelles said one of the topics on the table at the G20 meeting in Scotland would be the disparity between fixed and floating currency-exchange regimes. [ID:n5478541]
"The adjustment of the dollar against other currencies is unevenly distributed in the world today. There will be a discussion about this question of different foreign exchange regimes," he said.
Meirelles, Brazil's longest-serving central bank head, said countries at the G20 meet would also discuss their individual plans to roll back government stimulus as the global economy recovers from the financial crisis.
"We have to exchange ideas on the exit strategies to be sure that we understand what each other is doing," he said. (Reporting by Sebastian Tong; Editing by Chizu Nomiyama))
