RIO DE JANEIRO Brazil's week-old decision to let
its currency float against the dollar hasn't by any means calmed
investor nerves about Latin America's largest economy.
The Brazilian real fell again in early trading today, slipping
to 1.75 against the dollar from 1.70 at Thursday's close. The
Central Bank began selling dollars to support the real, which
strengthened some but soon headed down again.
The Sao Paulo stock exchange's Bovespa index rose by 1 percent
in morning trading. On Thursday, jitters over the plunging real
sent the Bovespa down by 4.6 percent after a euphoric 52-percent
rise the four previous days.
Market analysts had expected a brighter scenario Thursday after
good news from Brazil's Congress, where the lower house passed a
key bill on Wednesday that aimed to reduce the government's budget
deficit and instill new investor confidence.
But the weakening real has depreciated by about 31 percent since
Jan. 12, apparently keeping investors skeptical about Brazil's
ability to strengthen its shaky economy.
"If this isn't enough to attract inflows and kick-start
exports, things will only get worse," a currency dealer in Rio de
Janeiro said when the value of the real to the dollar plunged to
1.73 on Thursday. He spoke on condition of anonymity.
The real, which started Thursday at 1.59, made a slight comeback
to close the day at 1.70. Some dealers believed the Central Bank
intervened to prop up the currency, but it denied this.
A spokesman for President Fernando Henrique Cardoso said the
government did not intend to dump its free-float policy.
"The president has decided what course the real will take, and
we'll continue in the same way," said George Lamaziere in an
interview with CBN radio station.
He attributed instability to markets' finding their
"equilibrium" after the real's depreciation.
The government hopes its new currency policy will lure back
foreign investors with a cheaper real. It follows a six-month
period in which the Central Bank spent some $45 billion in foreign
reserves in a failed effort to support the real.
Brazil's biggest worry remains an outflow of dollars. Despite
the currency depreciation, some $1.7 billion has left the country
since Friday. Markets estimate that reserves have dipped below $30
On Wednesday night, the Chamber of Deputies passed a bill
reducing pensions for retired federal employees, which could save
the government $2.5 billion a year.
Even more important than the savings, the vote sent a signal
that Cardoso has the support needed to reduce the swollen budget
deficit. The pension bill had failed four times earlier.
The government has promised to reduce its estimated $65 billion
public deficit this year by about $16.4 billion. The pledge was a
condition for approval of a $41.5 billion loan package assembled by
the International Monetary Fund.
The Senate, which must approve the pension tax for the measure
to take effect, decided Thursday to make the matter an urgent
priority, meaning it could come to a vote as early as Tuesday.