* Mantega says rates, not FX, are right tool to fight
* Brazil rate futures signals Selic could rise in May
* Brazil real weakens 0.2 pct as central bank intervenes
* Mexico peso up 0.2 pct, other Latam currencies little
By Paula Laier and Natalia Cacioli
SAO PAULO, Feb 15 Brazil's interest-rate futures
soared on Friday as investors increased bets that policymakers
will tighten monetary policy this year, while the real trimmed
gains after the central bank intervened to stop it from
strengthening past 1.95 per dollar.
The jump in interest-rate contracts, which priced in a
strong chance that the central bank will lift the base Selic
rate as soon as in May, followed comments by Finance Minister
In Moscow for a meeting of the G20 group, Mantega said that
inflation above the government's target raises a yellow flag and
that monetary policy, not the exchange rate, is the right tool
to control prices.
"Mantega signaled the possibility of an interest rate hike.
Markets may start to change their view that the central bank is
stuck (with the current Selic rate), even as bank indicated that
in the minutes" of its latest monetary policy meeting, said a
fixed-income specialist at the proprietary trading desk of a
bank in Sao Paulo.
Interest-rate contracts maturing in January 2014,
one of the most traded, jumped 12 basis points to 7.51 percent,
on track to close at their highest level in four months.
Concerns about inflation have been causing domestic interest
rates to rise and the real to strengthen as investors bet
policymakers would initially favor a stronger currency to
cheapen the price of imported goods, but would still be forced
to raise the Selic later.
Even as Mantega denied once more that the exchange rate
would be used as a tool to fight inflation, the Brazilian real
continued to gain early on Friday.
It briefly strengthened past the level of 1.95 per dollar
for the first time in nine months when the central bank
intervened with an auction of reverse currency swaps -
derivative contracts that are designed to weaken the exchange
The real last traded at 1.9610 per dollar, 0.2 percent
stronger on the day, although analysts still believed it would
soon test the 1.95-per-greenback level again.
"The central bank will probably keep using a stronger
currency to curb inflation, but there probably won't be any
sharp move in the foreign exchange rate," said the treasury head
of a Brazilian bank on condition of anonymity.
On Thursday, a source on President Dilma Rousseff's economic
team said policymakers are more worried about curbing volatility
in the foreign exchange market, indicating the real could
strengthen past the level of 1.95 per dollar as long as the
appreciation is gradual.
Latin American FX prices at 1510 GMT:
Currencies daily % YTD %
Brazil real 1.9611 -0.20 4.02
Mexico peso 12.6700 0.16 1.53
Chile peso 471.1000 -0.08 1.61
Colombia peso 1785.5000 -0.15 -1.09
Peru sol 2.5680 -0.04 -0.66
Argentina peso 5.0050 0.00 -1.85
Argentina peso 7.6600 0.00 -11.49