Brazil central bank intervenes in spot FX for first time this year, sells $1.5 billion

February 25, 2021 3:16 PM EST

FILE PHOTO: Brazilian Real and U.S. dollar notes are pictured at a currency exchange office in Rio de Janeiro, Brazil, in this September 10, 2015 photo illustration. REUTERS/Ricardo Moraes

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By Jamie McGeever

BRASILIA (Reuters) - Brazil's central bank intervened in the spot foreign exchange market on Thursday for the first time this year, selling $1.5 billion in two auctions as the real slumped to its weakest against the U.S. dollar in over four months.

The central bank sold $920 million in its first intervention, followed by a sale of $615 million a couple of hours later as the dollar traded above 5.50 reais.

The U.S. currency traded as high as 5.5378 reais, a level not seen since early November, according to Refinitiv data. Its rally was part of a global surge, especially against emerging currencies, led by a sharp rise in U.S. Treasury yields.

"With 10-year U.S. yields some 100 basis points above their lows, the cost of opportunity of investing in Brazil has changed dramatically, especially as domestic risk have been rising in relative terms," said the head of trading at a bank in Sao Paulo.

The real has weakened almost 6% this year, one of the biggest decliners against the dollar anywhere in the world. It has failed to benefit from the strong rise in expectations that Brazilian interest rates will start rising soon.

Central bank president Roberto Campos Neto said recently that policymakers are concerned about high FX volatility, which has risen due to fiscal concerns, record low rates making it cheaper to use the real as a hedging instrument, and uncertainty surrounding the government's economic reform agenda.

"We would like to have low volatility. But remember that intervening on price is one thing, intervening on volatility is very different," Campos Neto said during a seminar hosted by Credit Suisse on Jan. 26.

The central bank has sold around $3 billion in currency swaps this year, according to brokerage Commcor DTVM. Spot dollar intervention last year amounted to $24.8 billion, it added.

(Reporting by Jamie McGeever; editing by Jonathan Oatis and David Gregorio)

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