(Bloomberg) — Brazil's government took unusual steps Tuesday to stem a currency collapse that has accelerated in recent weeks as investors grow concerned about the government's soaring budget deficit.
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As part of the latest in a series of aggressive moves, the central bank sold more than $3 billion in back-to-back auctions in the domestic market, in its fourth intervention in three days. The policy halted a sharp decline that had sent the real down more than 20% this year, pushing it to record lows, the most among major currencies.
The recent decline engulfing the real has spread across assets, with Brazil's dollar-denominated government bonds leading the losses in emerging markets. Brad Bechtel, Jefferies' global head of foreign exchange, called the disaster a “train wreck” that banks are trying to contain.
“Until the government steps up and takes the right fiscal steps, there is little that can be done to stop it,” he said.
Investors are increasingly skeptical of government promises to shore up public accounts and address the country's debt trajectory. President Luiz Inacio Lula da Silva announced new income tax cuts last month, along with a planned 70 billion reais ($11.5 billion) in spending cuts, a move the leftist leader still says is more pro-growth than economic growth. That disappointed traders who saw it as the latest sign of increased focus on the market. Financial outlook.
Central bankers led by Roberto Campos Neto raised interest rates across the board to 12.25% this month and promised two more hikes of similar size by March. Policymakers see the fight against inflation becoming “even worse” as both current price pressures and expectations for future consumer price increases accelerate.
According to the minutes of the interest rate decisions on December 10 and 11, both leaders cited the depreciation of the real as one of the reasons why the fight against inflation has become more difficult. The board added that it would “closely” monitor price pass-through.
finance bill
The currency closed 0.4% higher against the US dollar in Sao Paulo, reversing losses after falling as much as 1.2% earlier in the day. Traders in the local market said the move gained some support after Brazil's lower house added two spending cuts to its schedule for Tuesday's vote.
In two separate auctions on Tuesday, the central bank sold $1.27 billion shortly after the session opened and another $2 billion a few hours later. Auctions were held on Friday and Monday following similar operations.
