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Brazil moves to curb rampant real

Brasilia - Brazil took another bold move on Thursday to curb its hard-charging currency by making it more costly for banks to bet the real will keep strengthening.

The measures, announced just days after Dilma Rousseff was sworn in as Brazil's president, appeared to herald a tougher stance against the country's currency woes.

Rousseff took office promising to take action to rein in a rallying real that hurts exporters and threatens to undermine the competitiveness of Latin America's largest economy.

The central bank introduced a reserve requirement on banks' short positions in US dollars - a bet the real will strengthen versus the greenback - in hopes of reducing speculative trading in the foreign exchange market that has pushed the Brazilian currency to a two-year high.

The real weakened 0.66% after the measures were unveiled to 1.686 to the dollar. It has gained about 13% since last May, prompting Goldman Sachs to recently dub it the world's most overvalued major currency.

Brazil is grappling with an avalanche of foreign capital that is taking advantage of ultra low interest rates in the developed world to chase high returns in emerging economies.

The flood of hot money has driven up currencies from Chile to Turkey, prompting governments to take action to staunch the flow and defend their economies.

Brazilian banks will have three months to comply with the new rules, so the immediate impact on the foreign exchange market is likely to be muted.

"It doesn't significantly change the trend," said Flavio Serrano, senior Brazil economist at Espirito Santo Investment Bank in Sao Paulo. 

"The US dollar is losing value against major currencies because the US Federal Reserve is flooding the market with money. The central bank's measures are not going to change what the Fed is doing."

Starting April 4, local banks will have to make sure their total short positions in US dollars are either below $3bn or the value of their own core capital. The central bank will require banks to lock up the equivalent of 60% of any further bets against the dollar.

Short positions at all-time high

Banks' short positions in dollars surged in recent months to $16.8bn by the end of December, the highest volume since the government began tracking the data in 1994.

The central bank expects short positions in greenbacks to fall to around $10bn by April.

"We don't think it's good for the financial system when there are such significant shifts (in foreign exchange positions) in one direction or another," said Aldo Mendes, the central bank's monetary policy director.

"It's bad, because if there's a sudden onslaught of volatility in the foreign exchange market banks would have to scramble to cover those positions quickly, and that generates even more undesirable volatility."

The International Monetary Fund called the measures an appropriate step in Brazil's battle to strengthen its banking system in the face of massive capital inflows.

The measures marked the first policy change under Alexandre Tombini, who on Monday replaced Henrique Meirelles, Brazil's longest-serving central bank president.

Meirelles and Finance Minister Guido Mantega took a series of steps in late 2010 to curb the real. These included raising bank reserve requirements and tripling a tax on domestic bond purchases by foreign investors, among other measures.

Tombini stressed on Thursday that Brazil's beef is with hot money, not foreign investment.

"Brazil is adopting macro-prudential measures to ensure the stability of its economy. That doesn't mean the Brazilian economy isn't open to foreign capital," he said in an unusually long news conference by central bank standards.

Tombini also said the measures were no substitute for monetary policy. The central bank is widely expected to raise interest rates later this month to curb inflation, which is running above the center of the government's target range.

Though the central bank denies it targets a specific exchange rate, some analysts said the timing of the measures suggests the government is drawing a line in the sand at 1.65 per dollar. If the real threatens to pierce that level, more measures are likely, as Mantega warned earlier this week.

Manufacturers welcomed the new regulations in hopes they would usher in a more aggressive approach to the strong real.

"We really hope that the dollar will stop falling. This measure is good news for all manufacturers," said Cledorvino Belini, chief executive for Italian carmaker Fiat in Latin America and head of Brazil's automakers association.

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