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The Brazilian Real Retreats Ahead of Intervention Talk (BRF, SID, GGB)

January 6th, 2011

The Brazilian real fell 50 basis points today on a combination of sliding commodity prices and fear that central bankers will intervene aggressively to keep the currency’s value under control.

The Brazilian currency closed today at 1.65669 to the dollar, significantly weaker but still within sight of the dangerous 1.65 mark where the country’s monetary policy chiefs have previously started getting aggressive about talking the real back down.

Traders are looking to a hastily scheduled press appearance from Brazil’s newly minted central bank president Alexandre Tombini for hints on what will happen next.

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As an appointee of incoming president Dilma Rousseff, Tombini may be eager to prove his clout with a dramatic dollar-buying move, capital controls or some other intervention designed to weaken the real and show the world who is boss.

Fear of just such a move helped push the real down today, while weaker commodity prices also helped knock the upward momentum out of the currency, which tends to rise along with iron, oil and other raw materials.

Although the hype around the “currency wars” has calmed down lately — replaced by more substantial fears that inflation will force nations with already-strong currencies to boost them even further through higher interest rates — Brazil and other countries are still grappling with the effects of high exchange rates.

The real, for example, has surged 5.7% in value against the dollar since September 1, and gained roughly 4% over calendar 2010. This may have made it cheaper for Brazilians to buy U.S. goods, but also made Brazilian products less competitive in the global marketplace.

Steel companies in particular have suffered from the real’s strength as Asian competitors find it easier to dump their merchandise, receive reais in return and still book a significant profit. A weaker real could be sweet relief for companies like Companhia Siderurgica Nacional (NYSE:SID) and Gerdau Gerdau S.A. (NYSE:GGB), but will naturally depress interest in real-based funds like the Market Vectors Brazil Small-Cap ETF (NYSE:BRF).

Written By Tim Seymour From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.


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