Brazil’s Real Drops Most Since January as Japan Risk Threatens Demand

Brazil’s real declined the most in two months as investors fled high-yielding emerging-market assets amid increased risk in Japan of radiation leaks from a crippled nuclear power station.

The real fell 0.5 percent to 1.6677 per dollar at 10:59 a.m. New York time from 1.6598 yesterday. Earlier, the currency slid 1.1 percent for the biggest intraday drop since Jan. 6.

The Bank of Japan’s moves to provide short-term liquidity and expand an asset-purchase program failed to contain investor concern as the risk of nuclear radiation leaks north of Tokyo escalated. Stocks and U.S. futures sank, with the Nikkei 225 index posting its biggest two-day drop since 1987.

“The market is totally stressed,” said Felipe Brandao, emerging-markets analyst at currency broker ICAP Brasil SA. “Investors are seeking the safety of hard currencies,” he said in a telephone interview from Sao Paulo.

Real-linked debt may fall as Japanese investors, the largest holders of the bonds, bring funds home to pay for reconstruction following the earthquake, according to Guggenheim Capital Markets. Japanese investors will repatriate funds as the nation seeks to recover from the earthquake, Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., said in an interview on Bloomberg Radio with Tom Keene.

The real is falling today as investors anticipate Japanese investors who put money into Brazil seeking high interest rates will now pull money out as their country rebuilds from the earthquake, Vladimir Caramaschi, chief strategist at Credit Agricole Brasil SA, said in a telephone interview from Sao Paulo.

Moving to Safety
Brazil’s benchmark borrowing measure, known as Selic, is 11.75 percent after policy makers led by bank President Alexandre Tombini raised it half a percentage point on both Jan. 19 and March 2 to bring inflation down from a 26-month high. Japan target rate is between zero and 0.1 percent.

All 25 emerging-market currencies tracked by Bloomberg fell against the U.S. dollar.

“It’s a global movement to safety,” Andre Perfeito, chief economist at Gradual Investimentos in Sao Paulo, said in a telephone interview. “It’s not only Brazil, it’s all the emerging markets.”

Yields on most Brazilian interest-rate futures contracts reversed earlier declines and rose after the Labor Ministry said the economy created 280,799 government-registered jobs in February, compared with 190,900 jobs projected by the median estimate of five economists surveyed by Bloomberg.

The yield on the interest-rate futures contract due in January 2013 rose 3 basis points, or 0.03 percentage point, to 12.7 percent.