Brazil’s Central Bank Sells U.S. Dollar Reserves for First Time in Ten Years

RIO DE JANEIRO, BRAZIL – The Brazilian Central Bank began auctioning, on Wednesday, August 21, US$200 (R$800) million dollars from its currency reserves to stabilize the increasingly volatile exchange rate.

This type of operation had not taken place since February 2009, when the global economic crisis reached its peak due to the collapse of subprime lending in the U.S. housing market.

The new foreign exchange intervention strategy was announced last week, on August 14th. The Central Bank intends to sell up to US$ 3.845 billion by August 29th.

Last week, the Central Bank had announced that it would be willing to sell up to US$550 million per day. However, the demand did not hit the target, thus being below expectations.

On Wednesday, in addition to the cash sale, the Central Bank negotiated 4,000 reverse currency swap contracts, which work as a way to buy dollars in the futures market. The total offer was up to 11,000 securities.

One of the country’s primary instruments in defending against external shocks in the economy, currency reserves are currently at US$388 billion. If the US$3.845 billion are entirely sold, the operation will consume a little less than one percent of foreign reserves.

Ordinary buyers cannot buy dollars from international reserves. This type of operation is restricted to dealers — large banks and brokers authorized by the Central Bank to meet the demand for dollars by large companies and other financial institutions.

Up to the present moment, whenever the U.S. currency displayed rises, the monetary authority would auction traditional currency swap contracts, which are equivalent to selling dollars on the futures market.

Because the Brazilian Real (R$) is used in such operations, they do not affect international reserves. However, they produce an impact on the exchange position of the Central Bank and increase interest rates on public debt.

Now, the Central Bank has a different plan of action. It is aiming to sell up to US$550 million a day in the spot market and simultaneously buying the same amount in reverse currency swaps, which work as a way to buy dollars in the futures market.

Should the demand for spot dollars fall below this value, the monetary authority will complete the operation with traditional swap contracts.

When justifying the measure, the Central Bank explained that traditional currency swaps are demanded from investors who want to protect themselves from the exchange rate volatility. Also, according to the Central Bank, a section of the market is demanding spot dollars due to the economic situation.

The new intervention system had an immediate effect when it was implemented. Earlier yesterday afternoon, August 21st, the commercial dollar was being sold at R$4.021, down 0.76 percent.

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