back

Brazil's Real Ends At BRR2.340

By: Adriana Arai
The Wall Street Journal, December 21, 2001

SAO PAULO -- Brazil's real weakened marginally Friday in what market participants described as calm reaction to financial and social chaos in neighboring Argentina.

The local currency ended at BRR2.340 to the dollar compared with Thursday's close of BRR2.334, and still managed to post its eleventh consecutive week of gains even as a devaluation and debt default appear increasingly more likely in Brazil's neighbor to the south.

"I think the market has totally shrugged off the Argentine crisis," said a Sao Paulo-based trader. "I bought dollars yesterday thinking I'd sell (them) at BRR2.45 and ended up losing money," said the trader.

In separate statements Thursday, Brazilian President Fernando Hernique Cardoso and Central Bank Chairman Arminio Fraga said they thought contagion from the Argentine crisis had already taken place and further spillover is unlikely.

More cautiously optimistic are some market players and analysts, who believe there could be more contagion, though limited in duration and scope.

While Brazilian market reaction to the Argentine meltdown was a positive surprise, a consensus is forming that the real's appreciation trend of late could be coming to end.

"When the real hit BRR2.30 to the dollar (Wednesday), it seemed clear that it was a temporary undershooting whose timing people were trying to figure out. Now with such a difficult situation in Argentina, it's hard to believe the real will continue to strengthen," said a fund manager, who preferred to be unnamed.

Other traders express the same view, adding it remains very unclear what will happen to Argentina's economic policy after Fernando de la Rua's resignation from the presidency.

Some analysts, such as local consulting firm LCA Consultores, believe the real will likely weaken gradually in coming months and could reach BRR2.50 to the dollar.

In a report Friday, LCA added certain central bank decisions expected in the first quarter will also contribute to the real's depreciation.

Benign inflation figures are expected to lead the monetary authority to cut interest rates at some time in the first quarter, while the central bank is likely to reduce issuance of dollar-linked debt.

Brazil's real hit a record low of BRR2.835 to the dollar on Sept. 21.