* US GDP disappointment weighs on Latin American currencies
* Real drops as Mantega says dollar "will not melt down"
* Real trims losses as central bank sells dollars
By Walter Brandimarte and Alexandra Alper
RIO DE JANEIRO, Jan 30 The Brazilian real
weakened on Wednesday, following gains of over 2 percent since
the beginning of the week, after Finance Minister Guido Mantega
warned that the government was ready to correct any excessive
moves in the exchange rate.
The real trimmed losses, however, after the central bank
announced it was selling dollars with an agreement to repurchase
them in two months, effectively rolling over a line worth some
$1.2 billion that expires later in the week.
The real closed at 1.9875 per dollar, 0.2
percent weaker than Tuesday's close.
The Brazilian central bank's decision to roll over its $1.2
billion line was seen by analysts as the latest sign that the
monetary authority is willing to keep the real weaker than 2 per
dollar to help anchor inflation expectations.
"The central bank is using the currency as an instrument of
monetary policy," said Paulo Petrassi, a partner at Leme
Investimentos in Florianopolis, Brazil.
"I believe the real will now trade between 1.96 and 2.0 per
dollar -- that is a level that helps curb inflation without
hurting the competitiveness of industry."
The central bank's action came right after Mantega's
comments weakened the real to nearly 2 per dollar.
The real had strengthened past that level on Tuesday as a
central bank decision to roll over some currency swaps was
interpreted as a green light for a stronger exchange rate in the
Piercing the 2-per-dollar mark was a symbolic development in
Brazil's foreign exchange market because that had been a limit
to an informal trading band of 2.0-2.1 per dollar in effect
since early July.
For most of last year, the central bank intervened in the
market to weaken the real in a strategy to benefit exporters and
boost local industry. As late as November, Mantega had promised
Brazilian businessmen that a real weaker than 2 per dollar "was
here to stay."
Despite the recent rally, Mantega still sounded comfortable
with the current exchange rate, telling reporters in Brasilia
that the real has been "spontaneously moving to a more balanced
He warned, however, that the government would correct any
"excesses" in the exchange rate and assured that the dollar
would not "melt down" against the real.
An unexpected contraction in the U.S. economy in the fourth
quarter announced on Wednesday also weighed on Latin American
foreign exchange markets, keeping the currencies of Mexico
and Chile little changed against the dollar.
The Mexican peso dipped 0.06 percent to 12.7273 per dollar.
The U.S. Federal Reserve said it would continue its $85
billion bond-buying plan, as widely expected. Easy monetary
policies by the Fed and other major central banks could keep
pushing global investors into emerging market assets this year.
However, the Mexican peso has fallen more than 1 percent
from 10-month high on Jan.17 after the central bank warned it
could cut the benchmark interest rate if inflation keeps falling
and growth flags.
Lower benchmark interest rates could curb the attraction of
peso-denominated assets to global investors. Some analysts
think the shift in the central bank's stance reflects a desire
for a weaker peso.
One Mexican central bank board member, Manuel Sanchez, told
Reuters he thought external factors were more important in
driving peso at the moment than internal factors.
Solid U.S. demand has supported Mexico's economy, which
sends about 80 percent of its exports to the United States, from
sluggish global growth and helped the peso and local stocks,
which are trading at record highs.
Data last week showed bets in favor of the peso on the
Chicago exchange fell back from a record high of nearly $6
billion hit in the middle of the month.
The huge number of investors already betting on a stronger
peso could discourage new investors from piling in. A sharp loss
in the peso could send many speculators running for the exits at
the same time, which would drive the currency even weaker.
"Internal and external factors do favor the peso, but again
given everyone is very long already, it's going to be very
choppy," said Thin, who expects the peso to trade in the 12.6 to
12.8 per dollar range over the next week.
Latin American FX prices at 21:15 GMT:
Currencies daily % YTD %
Brazil real 1.9875 -0.18 2.64
Mexico peso 12.7273 -0.06 1.07
Chile peso 471.1000 0.08 1.61
Colombia peso 1776.510 -0.19 -0.59
Peru sol 2.5670 -0.23 -0.62
Argentina peso 4.9775 -0.05 -1.31
Argentina peso 7.8900 -1.14 -14.07