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Montevideo, September 25th 2018 - 01:38 UTC

Brazil enforces new reserve requirements to weaken the Real vis-à-vis US dollar

Thursday, January 6th 2011 - 20:48 UTC
Full article 7 comments
Aldo Mendes, Central bank’s director of monetary policy Aldo Mendes, Central bank’s director of monetary policy

The Brazilian currency Real weakened after the central bank introduced reserve requirements on short positions in U.S. dollars held by local banks with the purpose of weakening the Real which this week reached a historic high against the greenback.

The new reserve requirement have a potential to reduce short positions in the dollar to 10 billion from 16.8 billion USD in December as banks seek to avoid paying reserve requirements on currency operations, Aldo Mendes, the central bank’s director of monetary policy told reporters in Brasilia.

Starting April 4, Brazilian banks will need to deposit in cash at the central bank 60% of their short positions in U.S. dollars after deducting 3 billion or their capital base, whichever is smaller. The reserves deposited at the central bank will not earn interest, Mendes said.

Brazil is trying to curb a rally in the Real, which has strengthened 38% against the U.S. dollar since the start of 2009. Finance Minister Guido Mantega this week said the government is ready to take new measures to curb capital inflows and prevent the dollar from “melting.”

Brazil’s Real fell 0.5% to 1.6820 per U.S. dollar in early Thursday trading. Yields on the interest rate futures contract due in January 2012 rose 4 basis points to 12.13%.

Mantega said Jan. 4 that the government has an “infinite” number of tools at its disposal to affect the country’s exchange rate and support exporters hurt by the currency gains. Past measures including last year’s tripling to 6% of the IOF tax on short-term capital inflows have been “effective,” he said.

Brazil’s trade surplus narrowed 20% last year from 2009 as a stronger currency and the fastest economic growth in more than two decades fueled imports.

Mendes said on Thursday the reserve requirements seek to avoid “extreme” positions in the currency market. In 2009, Brazilian banks held 2.9 billion in long positions in dollars, swinging to 16.8 billion in short positions at the end of 2010.

The measures are “prudential” and could spur dollar purchases that weaken the Real, Mendes said.
 

Categories: Economy, Brazil, Latin America.

Top Comments

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  • Jeff

    Interesting article!
    Also, allow me to share that the Brazilian economy is booming, and shall keep this pace for the next few years. Internal consumption is going through the roof, foreign companies are arriving in Brazil every day = REAL valuation.....

    Jan 07th, 2011 - 02:29 pm 0
  • xbarilox

    Jeff, that's not truth, foreign companies arriving in Brazil every day doesn't mean REAL valuation. In Economy things are not that simple hahaha

    Jan 07th, 2011 - 04:59 pm 0
  • Fido Dido

    Xbox idiot,
    Brazil is booming for a couple reasons, you cannot say or type that about Argentina:
    Foreign companies arriving in Brazil, is a good thing and because it's stable than ever. Hot money is coming in from outside because of close to zero procent interest rates policies in the so called rich nations that are in reality broke or close to being broke (the IMF is robbing them right now). Big Brazilian and small businesses are booming, because of growing domestic demand and exports (though getting weaker because of strong real). Strong real is purchasing power for the Brazilian people. As i typed before, Brazil can become more competative if they cut their bureaucratic system that is outdated and tax reform. There is inflation in Brazil, though it's nothing compare to Argentina or Venezuela and even China, reason, demand grows faster than Supply. Tax reform and other important reforms are important to improve effiency in Brazilian producing sectors..agriculture for example. Economy is not simple for a clown like you.

    Jan 08th, 2011 - 11:31 pm 0
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