September 15, 2010 / 7:30 PM / 9 years ago

UPDATE 2-Brazil defends exporters in global currency battle

* Brazil’s finance minister says will fight appreciation

* Real down 1.1 percent on intervention threats

* Brazil could use sovereign wealth fund to curb rally (Recasts throughout, adds comments by finance minister)

SAO PAULO, Sept 15 (Reuters) - Brazil vowed on Wednesday to defend its exporters as governments worldwide moved to weaken their currencies as a way of speeding up an economic recovery.

Brazil’s central bank is fighting to curb appreciation in the country’s currency, the real, which has made exports more expensive and could cause long-term damage to its industry.

Finance Minister Guido Mantega said he would not sit on the sidelines “watching the game” while other countries weakened their currencies at the expense of Brazil.

“We’re going to take appropriate measures to stop the real from appreciating,” Mantega told an event in Rio de Janeiro.

One option, he said, would be to use Brazil’s sovereign wealth fund to soak up extra dollars from the upcoming fund-raising plan by state-owned oil company Petrobras (PETR4.SA) (PBR.N).

“We’re watching every market, every part, for inflows,” he said. “If inflows come we’ll buy it all. We’re not going to leave any excess of dollars in the market.”

Mantega said that other countries are relying on exports to lift their struggling economies.

“The United States and Europe are also trying to escape the economic crisis by selling exports. They make their monetary policy weak to devalue their currencies and export more,” he added. “We’re aware of this and we won’t let it happen.”

Japan intervened in currency markets on Wednesday for the first time in six years while Colombia announced fresh measures to weaken its peso and protect its exporters.

FIGHTING A LOSING BATTLE?

But despite the Brazilian government’s best efforts so far, the real is still trading near its strongest level against the dollar this year and is now ranked the world’s most overvalued major currency, according to Goldman Sachs.

Huge foreign investment in Brazil and growing demand for its higher-yielding debt have made the real double in value since President Luiz Inacio Lula da Silva took office in 2003.

U.S. dollar inflows BRCAPF=ECI to the country totaled $2.114 billion in the month through Sept. 10, the central bank said on Wednesday.

One of the most talked-about measures recently on Sao Paulo’s trading floors is the possibility of an auction of reverse swaps, a form of derivative which would have the same effect as buying dollars in the futures market.

That speculation also caused the real to weaken 1.1 percent to 1.725 per U.S. dollar BRBY in afternoon trading.

“I don’t know where it came from that the central bank was going to start offering swaps. But just with this, just with the threat, the (real) took a dive,” said Joao Medeiros, a partner at Pioneer Corretora, one of Brazil’s biggest currency brokerages. “The market is tense.”

Some analysts, however, believe the central bank is fighting a losing battle. For more see [ID:nN10251620].

The bank said earlier on Wednesday it had bought $815 million in dollars on the spot market in the month through Sept. 10. Since last Wednesday the bank has been calling two auctions daily, rather than just one, to buy dollars.

But these auctions are costly, since the bank gets next to nothing in interest for all the dollars that have piled up in its reserves. The same problem would arise if the government used its sovereign wealth fund to buy dollars.

Even reverse currency swaps did not stop a near 70 percent rally in the real when they were last used on a regular basis between 2005 and 2008. (Reporting by Rodrigo Viga Gaier in Rio de Janeiro and Silvio Cascione in Sao Paulo; Writing by Samantha Pearson; Editing by James Dalgleish)

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