MercoPress. South Atlantic News Agency

Brazil will not intervene to bolster the US dollar.

Brazil will not intervene in the domestic money exchange market to prevent a further depreciation of the US dollar against the Real, said this Monday Henrique Meirelles, president of the Central Bank.

"There's no need for the Brazilian government, or other governments for that matter, to control the adjustment process of the US dollar. What can be done is keep markets flexible and efficient so the process develops in the less dramatic possible way, and with the greatest efficiency", indicated Mr. Meirelles during a financial seminar in Sao Paulo.

"Surely it won't be the US government or other governments which will impede the structural adjustment of the US economy", insisted Mr. Meirelles who added that "with the depth of markets nowadays, with all the exchange movements and the arrangements and disarrangements of economies, it's extremely difficult to control exchange rates on the long term and even more difficult to anticipate those movements".

In the last few weeks the US currency in Brazilian money markets dropped from 2,90 Reales to 2,74 Reales, --generating concern, even in government circles--, about the consequences of a revalued Brazilian currency for the export driven model.

Last week Luiz Fernando Furlan, Development, Industry and Foreign Trade minister encouraged private companies to buy US dollars taking advantage of the drop in value or the US currency.

"If everybody feels that the US dollar is cheap, that means it's an excellent moment to buy dollars, not only to increase the country's international reserves, but also for those companies that owe dollars or have other dollar related deals", underlined Mr. Furlan.

President Luiz Inacio Lula da Silva also remarked in a recent interview that the Brazilian economy would benefit from a weaker Real. "I believe we're not interested in having the Real become a strong currency and we hope the dollar manages certain equilibrium. I think that a US dollar in the range of 2,90 to 3,10 Reales would be better for our exports", said President Lula da Silva pointing out that, "we need to keep bolstering our export growth, that is one of the main reasons of the 2004 success and we must keep the effort".

However, so far the only reaction of the Brazilian government to the depreciation of the US dollar has been the announcement of the Treasury that it will purchase in the coming seven months 3 billion US dollars in the local markets to pay back loans and reduce the overall debt.

But the Brazilian economic team insists with a free floating US dollar in local markets as the fundamental of its monetary policy.

"We shouldn't try to decide the ideal value of the US dollar", was Finance Minister Antonio Pallocci's answer during a recent interview.

However local financial analysts believe that the official reticence so far to act in support of a stronger US dollar and Brazilian exports is the need to comply with the inflation target. If commodities prices in Reales, with a stronger US dollar, increase, this "would interfere with inflation control and monetary policy".

"Any Central Bank intervention is limited by the need to check inflation", argues Francisco Carvalho from a Sao Paulo financial agency. "Maybe an exchange rate in the range of 2,75/2,90 Reales to the US dollar won't harm inflation or exports", said Mr. Carvalho.