Brazil Currency Plunges Amid Uncertainty
Tuesday March 28, 4:48 pm ET
By Alan Clendenning, AP Business Writer
SAO PAULO, Brazil (AP) -- Investors sent Brazil's currency and stocks on a wild ride Tuesday due to uncertainty about how a new finance minister will manage Latin America's largest economy in a presidential election year.
The Brazilian real plunged nearly 3 percent against the U.S. dollar and stocks on Sao Paulo's benchmark Bovespa index fell more than 1 percent in midday trading a day after Finance Minister Antonio Palocci resigned amid a political scandal and was replaced by Guido Mantega, president of Brazil's National Development Bank.
The currency and stocks later regained some lost ground as Mantega pledged to maintain President Luiz Inacio Lula da Silva's monetary policy which is aimed at taming inflation and setting the country on a path of slow and sustainable growth.
Investors were rattled anyway. Their biggest concerns: That Mantega may reduce interest rates too quickly to check inflation, currently at 5.5 percent, and may increase government spending to boost economic growth as Silva prepares for his anticipated re-election bid.
Elections are in October, and analysts say opposition leaders are sure to use the new scandal to try to hurt Silva and his Workers Party. That could force Silva to court his leftist base with populist economic policies loathed by financial players and Wall Street.
"The larger repercussion of Palocci's ouster will be in growing concerns over where a hypothetical second Lula mandate will be headed," said Christopher Garman, a Latin America analyst with the Eurasia Group. "This year's presidential election has become market-moving."
Palocci faces accusations of frequenting a house in Brasilia where lobbyists held parties with prostitutes and money arrived by the suitcase, possibly for political payoffs. He denies the accusations and ever setting foot in the house.
The real (BRR) closed below the psychologically important level of 2.2 BRR/USD, and is now 5 percent below its five-year high of 2.11 BRR/USD set on March 16, just before the scandal involving Palocci started escalating.
Stocks fell across sectors on the Bovespa index, which plunged 1.2 percent initially to 37,182 but recovered somewhat and was down 0.7 percent in late Tuesday afternoon trading. The index was down 5 percent from its all-time high of 39,239 set on March 3, however.Shares of Brazilian stocks that trade on the New York Stock Exchange also lost ground Tuesday.
Brazil's leading domestic airline TAM SA, whose American depositary shares were NYSE-listed on March 10, was among the biggest decliners in the group. The stock tumbled 96 cents, or 4.9 percent, to USD 18.74.Shares of energy company Companhia Energetica de Minas Gerais shares dropped USD 3.38, or 7.4 percent, to close at USD 42.05 on the NYSE while shares of Uniao de Bancos Brasileiros SA -- Brazil's biggest bank known more commonly as Unibanco -- sank USD 5.05, or 6.4 percent, to USD 73.90.
Analysts said there was concern over whether Mantega might seek changes at Brazil's Central Bank, and over whom he will pick to replace widely respected economic officials who departed with Palocci, including Deputy Finance Minister Murilo Portugal and Treasury Secretary Joaquim Levy.
Traders said the concerns about Mantega caused the declines, as big financial players shifted emerging market investments to safer harbors like the United States.
Foreign investors had poured money into Brazilian equities and debt in recent years, attracted by Brazil's relative economic stability as well as higher interest rates and returns than they could get in the United States.
The volatility might continue until investors see how Mantega operates, said Adauto Lima, chief economist at the Brazilian unit of West LB bank."So far, his views about the long term seem rather nebulous," Lima said.
In a note to clients, JP Morgan Chase & Co. said Brazil seems stable for now, but added that "the economic performance of an eventual second Lula administration is now more uncertain."
During Palocci's tenure, Brazil's economy saw increased jobs and a reduction in the double-digit inflation that hurt tens of millions of the country's poor. "I leave happy for what I've accomplished," he said Tuesday.
Around the World the USD strengthens
The dollar rose against most major currencies Tuesday after the Federal Reserve hiked interest rates for the 15th consecutive time and hinted at further credit tightening.
The euro bought 1.2009 USD/EUR in afternoon New York trading, down from 1.2012 USD/EUR in New York late on Monday. The British pound slipped to 1.7434 USD/GBP from 1.7463 USD/GBP.The USD rose against the JPY, climbing to 117.91 JPY/USD yen from 116.69 on Monday.
Under new chairman Ben Bernanke, the central bank raised short-term interest rates by a quarter percentage point to 4.75 percent as the markets widely had expected. The Fed's statement on the meeting left open the possibility of further rate increases.
"The statement gave no particular indication that the Fed is close to being done with raising rates," said Dan Katzive, a currency strategist at UBS AG. "The dollar is firming, and the markets are discounting a little bit more Fed tightening."
Higher interest rates tend to push up a nation's currency by boosting returns from locally denominated investments, making them more attractive.
Bob Sinche, head of global foreign exchange strategy at Bank of America, said the markets are now anticipating another quarter-point hike at the Fed's next meeting in May with an increased possibility of further hikes beyond that."But we think the markets may be getting ahead of themselves," he said.