Brazil Real Weaker As Greek Crisis Drags On

The Brazilian real weakened against the U.S. dollar in early trading
Monday on renewed risk aversion because of the Greek debt crisis.

As of 1230 GMT, the real was trading at BRL1.6040 to the dollar after
ending at BRL1.5945 Friday, according to Tullet Prebon via Factset.

European finance ministers met over the weekend to review efforts at
heading off a Greek default. The meeting broke up with the ministers
demanding a firmer Greek stance on fiscal austerity before releasing
more European funds to the Greek government.

The Greek government faces a crucial confidence vote on Tuesday. Even
if successful in imposing more austerity measures, the European Union
and the International Monetary Fund are not likely to release more funds
to Greece until July.

With the Greek crisis likely to drag on for days or even weeks to
come, global investors have turned more risk averse. Rising risk
aversion hurt the euro in early trading Monday, with the dollar gaining
ground as a safe-haven investment.

“The Brazilian foreign exchange market is likely to remain tied to
overseas events for at least the next few days,” said Alfredo Barbutti, a
trader at Sao Paulo’s Liquidity brokerage.

Barbutti noted that Brazil’s government has become less aggressive about soaking up dollars from the domestic market.

“The government has not been using all of the instruments at its disposal to soak up dollar liquidity,” Barbutti noted.

In fact, in recent days the central bank has limited its intervention
to a single snap auction per day at which it buys limited volumes of
dollars from the market. Earlier this year, the central bank was using a
number of different mechanisms to soak up dollar liquidity, including
purchases of forward dollar contracts and swap auctions on the foreign
exchange futures market.

According to many analysts, the reason for the government’s less
aggressive stance could be a shift from worries about appreciation of
the Brazilian real to worries about inflation. The real has gained about
20% against the U.S. dollar over the past two years, hurting exporters
and manufacturers.

“However, the strong real also helps keep down inflation,” said Luiz
Carlos Mendonca de Barros, partner of Sao Paulo’s Quest investment fund.
“With inflation over 6.5%, the government has an interest in keeping
imports cheap.”

Declining global commodities prices Monday also hurt the Brazilian
real. Lower commodities prices hurt Brazilian export revenues.