MercoPress. South Atlantic News Agency

Brazil trusts the Fed will end liquidity program in July thus boosting the US dollar

“We know this story won’t last long”, according to Mantega

Brazil believes the impact of an undervalued US dollar which is appreciating other currencies such as the Brazilian Real, ‘won’t last long’ according to forecasts from Finance Minister Guido Mantega.

“We know this story won't last long, because the second round of the so-called policy of monetary expansion, quantitative easing, ends July first and I am hopeful there won't be quantitative easing three” Mantega told reporters at an event in New York.

Financial markets are anticipating that at the end of the second quarter the Fed will finalize the current policy of reinvesting principal payments from its securities holdings and the purchase of 600 billion US dollars of longer-term Treasury securities, a policy described as quantitative easing.

However the Brazilian government “will continue to take measures to prevent the excessive appreciation of the Real” that is hurting Brazil’s export competitiveness. In addition, the Brazilian Central Bank has stepped up purchases of dollars in the spot market, forward-dollar contracts and reverse-swap auctions.

Investors have been revising their forecasts for the Brazilian Real lower, and now expect an average exchange rate of 1.63 Real per dollar for the year from the current 1.56.

Strong domestic demand, together with the global spike in commodities prices, has shown its ugly side in recent months as inflation has risen at an alarming pace. Inflation as measured by the country's official IPCA consumer price index is currently running at an annual rate of 6.3% through March, the latest figures.

Inflationary pressures should ease in the second quarter, Mantega said during his speech at an event in New York. “We are starting to see that inflation indexes are starting to give some positive signals,” the minister said.

Mantega added that he doesn't expect that global commodities prices, one of the key culprits behind inflation around the world, will keep rising.

Stabilizing commodities prices should help Brazil end 2011 with an inflation rate “similar” to 2010's 5.9%, Mantega said. That would be above the government's official target of 4.5%, but within a tolerance band of plus or minus two percentage points.

Economists, however, don't share the finance minister's cheery outlook. In the Brazilian Central Bank's weekly survey of economists and market analysts, released Monday, estimates for year-end 2011 inflation rose once again, to 6.29%.

Mantega also said that Brazil expects to meet its primary budget surplus in 2011, while also aiming to reduce the nominal deficit to zero over time. The minister said that March's primary surplus will be “very solid.”