The central bank of Brazil has announced that it stands ready to intervene on foreign exchange markets in a bid to stop the freefall of the national currency, the real. However, the experiment may cost Brazil dearly.
The Banco do Brasil said it was preparing to intervene on currency markets as of Friday by making available $55 billion (41.2 billion euros) to support the sagging real.
The national currency has dropped some 20 percent in value in the course of the current year, with market pundits warning the worst would be far from over without any effective countermeasures being taken.
The central bank announced in a statement that it would engage in so-called swap operations. It said it would offer dollars in the futures market, tied to a pledge to buy them back within a predetermined time span no matter what they were worth when maturity was around the corner.
Throwing good money after bad?
The bank of Brazil said it would offer $500 million a day from Mondays though Thursdays, with another $1 billion on Fridays.
So far, it has already made available $45 billion, meaning that, by the end of the year, the lender will have spent a total of $100 billion for the rescue bid, representing nearly a quarter of Brazil's international reserves.
Market pundits construed the swap operation initiative as a bet that the dollar would not continue to rise, with the bank then having to spend fewer reais when it had to buy back the dollars as the contract matured.
The real has come under enormous pressure because of the US Fed's announcement that it might change its ultralax monetary policy soon. This has prompted investors to withdraw capital from emerging economies. However, the real has also suffered from the nation's low growth rate, high inflation, mounting public debt and postponed structural reforms.
hg/kms (AFP, dpa)