Brazil real hits 12-year high, Mexico peso gains

RIO DE JANEIRO: Brazil's currency, the real, gained to its strongest levels in 12 years on Friday, as investors bet domestic interest rates and growth will outpace those in more developed markets.

The real jumped 0.4 percent to 1.554 to the dollar, its strongest intraday price since January 1999, shortly after Brazil's central bank ended its crawling-peg exchange-rate system and let the currency float freely against the dollar.

The Mexican, Chilean and Colombian pesos all gained. Peru's sol weakened.

"We are in a global situation right now where Brazil is very attractive to investors, especially those in the US Japan and Europe were rates are low and growth is slow," said Andre Perfeito, who as chief economist helps oversee $1.3 billion in assets at Sao Paulo-based Gradual Investimentos.

The real's strength -- it's gained more than 6 percent against the dollar this year -- is likely to lead to the government taking new measures, sometimes called "macroprudential" to try and stop gains and rein in inflation, he said.

The most likely measures are new investment taxes and increased bank reserve requirements, he said.

Raising the country's 12.25 percent benchmark interest rate in an attempt to control consumer price increases -- now above the 6.5 percent limit of the government's target range -- will only attract more money to Brazil, helping the currency gain, he added.

Foreign net bets the real will gain against the dollar reached an all-time high on Wednesday of $22.1 billion on Sao Paulo's BM&F futures exchange. Thursday's total slipped to $21 billion, still one of the highest levels on record, according to the BM&F and Reuters.

And as the currency gains, calls from politically powerful manufacturing industries to stop the strong currency from pricing their products out of export markets will rise.

"We are at a difficult point, he said.”The government has to choose if it will let the currency keep rising or if it will take stronger measures to halt its gains. Both decisions carry political and economic risk."

Mexico's peso gained 0.8 percent to 11.6341 to the dollar after the Institute of Supply Management said its index of US factory activity topped market expectations.

Mexico gets about 80 percent of export earnings from the United States.

In Venezuela, whose President Hugo Chavez announced Thursday from Cuba that he underwent cancer surgery, the nation's black market currency rate was unchanged at about 8.5 bolivars to the dollar still.

Under Venezuelan law, the government has an official exchange rate of 4.30 bolivars per dollar for goods such as food and medicine, and another of 5.30 for dollars made available to businesses by the Central Bank on a tightly-controlled basis.

The spread, or difference in yield, between Venezuelan bonds in dollars and comparable US Treasury debt fell 37 basis points according to JPMorgan's EMBI+ emerging market bond index. Spreads gauge perceived political or market risk of a financial asset.

Investors on Friday demanded 10.13 percentage points more of yield on a Venezuelan bond than a similar US Treasury, compared with 10.5 percent on Thursday. A basis point is 1/100th of a percentage point

Investors are betting Chavez's illness may lead to his departure from power, cutting intervention in the economy and reducing the risk of investing in Venezuela.

Chile's peso strengthened 0.3 percent to 466.00 to the dollar, its fifth-day of gains. It is trading at its strongest levels since May. Colombia's peso gained 0.5 percent to 1,760.95.

Copyright Reuters, 2011