September 21, 2010 / 10:23 PM / 9 years ago

EMERGING MARKETS-Brazil's real soars despite govt. assault

* Mexican peso gains 0.4 pct after Fed statement

* Brazil’s real jumps 1.2 pct in international trade

* FX traders to test resolve of Brazil’s authorities

(Adds details about Fed statement; updates prices)

By Samantha Pearson and Jean Luis Arce

SAO PAULO/MEXICO CITY, Sept 21 (Reuters) - Brazil’s real recorded its biggest one-day gain in two months on Tuesday despite moves by the government to tame the currency’s rally and protect exporters.

The U.S. Federal Reserve hinted it may pump more money into the economy, prompting a rally across Latin America’s currencies. [ID:nN20109053]

Further quantitative easing would encourage more yield-hungry investors to pour their money into Latin America’s debt, making it even more difficult to contain the appreciation of the region’s currencies.

Brazil’s government late on Monday authorized use of its sovereign wealth fund to buy U.S. dollars in the foreign exchange market as part of efforts to weaken the real. [ID:nN20102448]

But the country’s finance minister said on Tuesday the government was still assessing whether to use the fund and the real’s gains in international trading showed a muted reaction . [ID:nN21153702]

“The growing levels of verbal intervention, if not followed soon by more effective measures, will just embolden the market to press BRL even higher,” said Tony Volpon, head of emerging market research for the Americas at Nomura Securities.

The Brazilian real soared 1.2 percent to 1.7116 reais per U.S. dollar, its biggest one-day gain since July 22, according to the international reference rate BRL=. On the local spot market, which closed before the announcement on Monday, investors were still pricing in the news, leaving the real only 0.58 percent stronger at 1.716.

The real has rallied against the dollar partly on expectations of massive inflows related to the upcoming share offering of state-controlled oil company Petrobras (PETR4.SA) (PBR.N).

The central bank reported on Tuesday that inflows to Brazil totaled $11.135 billion in the month through Sept. 17. That is more than three times the amount of cash that flowed in throughout the rest of the whole year. [ID:nN21156481]

Petrobras is expected to raise up to $79 billion on Thursday, in what could be the world’s largest-ever share offering.

Jorge Knauer, head of foreign exchange at Banco Prosper in Rio de Janeiro, said he expected the reaction to the government’s latest measure to be limited.

“I don’t think this is going to prompt a big rally in the dollar (against the real), but it could put a floor on the currency at around 1.72 or 1.73, so that from here onward, someone who is planning to sell a lot of dollars is going to think twice,” he said.

FED STATEMENT BOOSTS REGION

The Mexican currency MXN= strengthened 0.42 percent to 12.727 per dollar, hitting a fresh four-week intraday high, after the Fed's statement.

Mexico’s fragile recovery is dependent on U.S. growth since the country relies on its northern neighbor to buy about 80 percent of its exports.

“The reaction was positive because (the Fed) has opened the door to quantitative easing if things get worse,” said Francisco Diez, director of emerging market trading at RBC Capital Markets in New York.

But the peso’s gains were limited due to a recent rally, he said. “In the last two or three days, it has risen quite a lot and there is little room for more gains. There is some technical support at the 12.72 level.”

The Chilean peso CLP= closed 0.14 percent stronger at 497.20 per dollar. The gains were capped by declines in the price of copper, the country’s main export.

Additional reporting by Jose de Castro in Sao Paulo, Froilan Romero in Santiago and Caroline Stauffer in Mexico City; Editing by Andrew Hay

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