By Diana Kinch
RIO DE JANEIRO--Brazil's real weakened further against the U.S. dollar late Tuesday after speculative trading attempted to test the Brazilian central bank's limits on market intervention and as foreign investors were reported to be abandoning the real amid lower-growth expectations for Brazil.
The real exited active trading at BRL2.0624 to the dollar, well below its Monday close of BRL2.0468, according to Tullett Prebon via FactSet.
Risk aversion continued high among global investors due to continuing uncertainties over the efficacy of bailout plans for Spanish banks disclosed at the weekend and after ratings company Fitch on Monday downgraded the credit ratings of Spain's biggest banks, Banco Santander SA (STD, SAN.MC) and Banco Bilbao Vizcaya Argentaria SA (BBVA, BBVA.MC).
However, economists said the real responded more to local movements Tuesday than to any new global factor as traders speculated on whether the central bank would again re-enter the market with a swap auction--after three such interventions so far this month.
The real failed to strengthen even after central bank President Alexandre Tombini said in a senate hearing that there is currently a significant outflow of dollars from the country, which would normally strengthen the local currency.
Tendencias Consultancy's Bruno Lavieri described the real's further weakening Tuesday as a "strange movement" after the central bank's intervention Monday with a dollar-swap auction in an attempt to prop up the local currency.
For Flavio Serrano of Espirito Santo Investment Bank, the weakening of the real--which has reached its lowest level in several weeks--was purely speculative. "The market's testing a possible intervention of the central bank. It's not clear yet what the central bank's limit would be."
Dollar-swap auctions allow investors to exchange paper linked to domestic interest rates for contracts indexed to the U.S. dollar. The auctions are a tool to smooth volatility in the market when the real is weakening against the U.S. currency.
Mr. Lavieri noted that the central bank's intervention Monday was designed to bring liquidity to the futures market where investor confidence has been undermined by the government's use of the IOF tax on derivatives transactions. "The central bank attempted to correct this situation but only 20% of the $2 billion it offered was taken up by the market; with this low demand for swaps, it's logical they wouldn't re-enter the market again today.
"The government meanwhile doesn't seem bothered with the exchange rate at around BRL2 to the dollar, which boosts profitability for industry and exporters," Mr. Lavieri noted.
Investor confidence may even becoming eroded in Brazil following the downward revisions of forecasts for 2012 and 2013 gross domestic product this week, he said. Central-bank analysts have revised down estimates for Brazil's 2012 GDP growth to 2.53% from 3.20% a month back.
The expectation that the central bank will reduce interest rates again--from the current historically low rate of 8.5%--is also maintaining pressure on the real to weaken, according to Reginaldo Siaca, manager at Advanced Brokerage in Sao Paulo. "The market is going to continue testing the central bank, especially after it failed to sell even half of the swaps it offered yesterday," Mr. Siaca said.
--Brian Asher contributed to this article.
Write to Diana Kinch at email@example.com.