Brazil's central bank announced a currency-intervention program on Thursday that will provide 60 billion dollars worth of cash and insurance to the foreign-exchange market by year-end, a move aimed at bolstering the country's currency, the Real which has slipped to near five-year lows against the dollar.
The bank said in a statement it will sell, on Mondays through Thursdays, 500 million dollars worth of currency swaps, derivative contracts designed to provide investors with insurance against a weaker Real. On Fridays, it will offer one billion dollars on the spot market through repurchase agreements.
Both are designed to prevent companies and individuals with dollar obligations from scrambling to the market at the same time, afraid that waiting will force them to pay more to buy dollars. When that happens, the Real tends to weaken further and faster.
The program starts on Friday and runs until December, the central bank said, adding it may announce additional auctions if it sees fit.
The move comes as the government seeks ways to control inflation and keep the Real from sliding while at the same time trying to kick-start an economy that has stagnated despite a rapid expansion of credit. While a weaker Real can help Brazil's export of commodities and manufactured goods, it makes raw materials and other imports more expensive, helping drive inflation higher.
In addition to controlling inflation, higher rates would attract investment to Brazil, helping the Real firm against the dollar. At the same time higher rates could also slow growth by making borrowing more expensive.
The central bank's Copom monetary policy committee, which sets Brazil's benchmark rate, meets on August 28.
The Real weakening and the Copom meeting come as the United States Federal Reserve is moving closer to ending a bond-buying program that has injected billions into the US economy driving down interest rates.
As a result investors have been searching for higher-yielding, emerging market securities.
With the end of the Fed's quantitative easing program expected soon, capital flows have flowed out of emerging markets such as Brazil and back to the United States and other developed countries, helping to weaken the Real.