Elsewhere Chile's peso gained against the dollar after the country's finance minister said, for a second time this week, that he does not think capital controls are the way to stem gains in Chile's currency. Mexico's peso weakened from a 2 1/2 year high.
Minutes of Brazil's April 20 Central Bank policy meeting, released early Thursday, said all seven bank directors agreed that the country faced inflation levels that require a "prolonged" series of rate hikes.
At the same time, only two voted for a market-expected 50-basis-point increase. The resulting increase was 25 basis points to 12 percent.
"There is a bit of disconnect between what the government is saying and what they are doing," said Pedro Tuesta, interest-rate and foreign exchange analyst with 4Cast Inc. in Washington, DC. "The longer you delay choking off of inflation the more inflationary inertia creeps in." While higher interest rates can make investments more attractive for lenders they can also choke growth by limiting credit for expansion. If higher rates fail to check inflation the economy can be hit with a double burden of rising consumer prices and higher debt costs.
Economists surveyed by Brazil's central bank raised their average estimate of inflation for 2011 to 6.34, their seventh- straight weekly rise, in a report released Monday.
Brazil's currency shed 1.15 percent to 1.587 reais to the dollar, and was on track to mark its steepest one-day percentage loss since early November.
The real has shed about 1.5 percent in the last two-sessions, cutting into a rally since mid-March that nearly took the currency to its strongest level since January 1999. As inflation concerns for Brazil have grown, net dollar flows to the country have also slowed, falling to 133 million in the first 14 days of April, a tiny fraction of the average 11.9 billion for the first three months of 2011.
Brazilian traded dollar futures fell on Thursday signaling market expectations the real will weaken further in the coming days. The first future traded in Sao Paulo saw real expectations weaken to 1.585 to the dollar for contracts expiring tomorrow. The second future, which expires May 31, showed May expectations for the real weakening to 1.587.
Brazil's Bovespa Index of the Sao Paulo's stock exchange fell 1.43 percent and year-end overnight interest rate expectations rose 4 basis points to 12.33 percent on the BMFBovespa Futures Exchange, the highest level in more than four weeks. The Chilean peso firmed 0.33 percent to 460.70 to the dollar.
Data showed Chile's industrial output surged in March and the central bank signaled in policy minutes that policymakers would keep raising interest rates.
Higher-interest rates would boost the appeal of Chile's peso, while comments from the finance minister ruling out capital controls also gave investors more confidence to push the currency stronger.
Mexico's peso weakened sharply on Thursday, partly hurt by speculation the central bank could increase its dollar reserve accumulation program in its monthly sale of dollar put options on Friday.
"This is pure speculation, but I think this could happen, since we have seen such big flows into the market," said Salvador Orozco, a currency and debt strategist at Santander.
But other traders doubted the central bank would abruptly move to change the mechanism. Central bank officials have recently said they were happy with the pace of reserve accumulation.
The peso shed as much as 0.52 percent to 11.59 per dollar before bouncing back to trade at 11.5730 per dollar.
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