MercoPress. South Atlantic News Agency

Brazil’ central bank forex surpass the 300 billion USD mark…but at a cost

A massive capital influx after Brazil’s high interest rates

Brazil's forex reserves surpassed the 300 billion US dollars mark for the first time ever this week according to the country's central bank as a result of recent heavy foreign exchange inflows and accelerated US dollar buying by the institution.

The bank said foreign reserves rose on Wednesday to 300.27 billion from 299.8 billion on Tuesday.

Brazil's foreign reserves have risen rapidly over recent years under the impact of heavy central bank dollar buying to control the appreciation of the country's currency, the Real. In the past 24 months the Real has gained more than 30% against the dollar in response to hefty incoming foreign investment.

Brazil's reserves had surpassed the 200 billion USD mark on 26 June 2008, having rising from less than 40 billion USD in 2002.

In January, the bank acquired nearly 8 billion from the local foreign exchange market following the net inflow of foreign investment in the month totaling more than 15 billion USD.

Brazil currently ranks sixth among nations in accumulation of foreign reserves, coming behind China, Japan, Russia, Saudi Arabia and Taiwan. India, Korea and Hong Kong follow immediately after Brazil.

At the end of 2010 forex reserves stood at 288.570 billion. Last year the Brazilian central bank bought 41.1 billion US dollars and so far this year 10.8 billion USD as a result of the massive influx of investors looking for the high rates paid by the government bonds and issues.

Only in January the influx of capital had a surplus of 15.5 billion USD, the second highest since June 2007 with 16.5 billion USD.

Even when forex reserves help to insulate the country from foreign shocks, they have a high cost. Brazil sells bonds and other papers in the domestic market paying up to 15% annually while it can only manage 3% when investing forex overseas.

The policy to buy foreign currency to stop the fall of the US dollar against the Brazilian Real was adopted in 2004, when forex reserves stood at 40 billion USD.