FOCUS-Brazil's real slumps to 1.73/dlr on outflows
Reuters, Thursday, January 21, 1999 at 12:40
By Shasta Darlington
SAO PAULO, Jan 21 (Reuters) - Brazil's teetering currency
took another blow on Thursday, tumbling 8 percent against the
dollar as persistent capital flight and unsettling rumors
roiled foreign exchange markets, traders said.
The real was sinking in afternoon trade at 1.73 to the
dollar, down a sharp 8 percent from Tuesday's 1.59 real close.
The currency has dived 30 percent since last week when the
Central Bank began to ease its iron grip on the once
rock-steady real.
Steady dollar flight since the real was allowed to float
freely against the dollar, even after a key interest rate was
jacked up to 41 percent, is close to draining the country's
private dollar stock, traders said.
"We're seeing $300 million leave the country every day, and
the Central Bank isn't intervening with reserves any more," a
fixed-income trader at Unibanco in Sao Paulo said. "The market
has run out of dollars."
Speculation over big dollar outflows Thursday and fear that
Brazil's woes could spread to Venezuela and Argentina also
unnerved investors, traders said.
Dealers were alarmed by remarks from Morgan Stanley Dean
Witter global strategist Barton Biggs. "I'm very afraid it (the
currency crisis) will claim other victims in Latin America," he
said at a panel in Tokyo. "The most obvious one is Argentina."
A trader in Sao Paulo commented: "It's general nervousness
all around about big dollar outflows today, a devaluation in
Argentina and the trading band in Venezuela."
The Argentine government later rejected Biggs' statements.
"Evidently, he does not know about the strengths of (the
Argentine regime)," Secretary for Economic Planning Rogelio
Frigerio told Reuters.
After a failed attempt at an 8 percent controlled
devaluation last week, the Brazil's Central Bank announced
Monday it would altogether cease to use its cherished reserves
to defend the currency, sending the real tumbling further
against the dollar.
Banks, which had stockpiled between $1.5 billion and $3
billion against a potential devaluation when dollars cost less
than 1.2 reais, let their inventory loose on the market after
the Central Bank's decision sparked a surge in demand for the
U.S. currency.
Brazilian companies that had failed to hedge against the
devaluation have been big dollar buyers, traders said, as they
try to protect themselves against the possibility of a further
slide in the real.
As a result, though reserves have barely been dented, money
continues to run out of the country at an alarming rate,
traders said.
"Things could get very ugly," the Unibanco trader said.
"The currency is just going to get worse and there's no telling
where this will end, or when, if at all, the Central Bank will
intervene."
When the Central Bank began the currency free float,
officials said the bank could step in to smooth abrupt changes
in the forex rate. But on Thursday, the head of the Central
Bank's economic department reiterated that the market will
determine the rate.
"There is no intention of intervening and I am unaware of
any intention in that respect," Altamir Lopes told a monthly
news conference. "The market has fluctuated as a result of the
daily (dollar) flows."
Brazil spent more than $40 billion of its precious reserves
to defend the currency between between last July and January.
With an injection of cash from the International Monetary Fund,
reserves now stand at about $36 billion.
"That level doesn't really permit for much intervention,"
one forex trader said.
Many economists have said the currency could crash as low
as 2 reais to the dollar once the supply of dollars in private
banks really dries up in Brazil.
Some traders claim this has already happened. More
optimistic forecasts give Brazil's private dollar stock less
than a week before it is drained, though they expect
budget-tightening and monetary policies to take some off the
pressure on the real.
A net $334 million left Brazil Wednesday, bringing total
dollar loss so far this month to $6.494 billion. Outflows had
been expected to decline after Brazil lost $5.16 billion in
December.
shasta.darlington@reuters.com))
Copyright 1999, Reuters News Service
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