Brazil Real Joins Emerging-Market Slide as Traders Look to Fed

(Bloomberg) -- Brazil’s real declined for the first time this week amid a broad selloff in emerging-market assets after the U.S. Beige Book economic survey appeared to strengthen the case for Federal Reserve rate increases.

The real lost 0.5 percent to 3.1563 per dollar Friday in Sao Paulo as U.S. officials weigh the case for the first interest-rate hike since 2015. The currency is up 1.6 percent in the week. A Bloomberg gauge of emerging-market currencies fell 0.3 percent as traders priced in a 68 percent chance of a rate hike in the U.S. in December.

Currency traders have been lured to Brazil this year by the country’s high interest rates, which are as much as 28 times those of the U.S., helping to turn the real into the world’s best performer this year. Borrowing dollars to lend in reais has returned 38 percent in a so-called carry trade. However, the interest-rate gap is narrowing now after the Brazilian central bank, led by President Ilan Goldfajn, voted unanimously to cut the benchmark Selic rate by 25 basis points to 14 percent on Wednesday.

"Sentiment for currencies such as the real has deteriorated as Fed expectations are edging higher," said Georgette Boele, a currency and commodity strategist at ABN Amro NV in Amsterdam and one of the real’s top forecaster last quarter. "If Fed hiking expectations increase the currency will suffer."

Speculation surrounding U.S. monetary policy overshadowed expectations of a jump in dollar flows coming into Brazil as the deadline approached for a program that encourages citizens to repatriate undeclared overseas funds. The real has advanced 26 percent this year on bets that President Michel Temer will be able to win back investor confidence. The repatriation bill is expected to help trim a budget deficit that cost Brazil its investment grade in 2015.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.09 percentage point to 12.19 percent. They are up 0.22 percentage point this week.

--With assistance from Ney Hayashi To contact the reporter on this story: Paula Sambo in Sao Paulo at psambo@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Sebastian Boyd, Jessica Brice