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Brazil’s foreign exchange move paves way to reduce $385 billion reserve stash

Brazil’s foreign exchange move paves way to reduce $385 billion reserve stash

BRASILIA: Brazil’s decision to sell dollars on the spot market for the first time in a decade is a sign the central bank is finally willing to reduce its $385 billion pile of foreign exchange reserves, analysts said.

Officially, the central bank’s announcement on Wednesday that it will sell dollars – along with existing sales of reverse currency swaps – was designed to meet rising demand due to global market volatility and does not reflect a change in the central bank’s floating exchange rate policy.

There is no suggestion the central bank is in any way targeting the exchange rate. And at $3.84 billion, the operation set for the seven trading days over Aug. 21-29 represents just 1% of overall reserves.

But beyond simplifying the central bank’s currency derivatives position, the sale of dollars could mark the first step in longer-term strategy shift by central bank governor Roberto Campos Neto, analysts and investors said.

“This is a change of tactic, as well as signaling that there is no problem with selling FX reserves as long as it is a measured sale,” said Cleber Alessie Machado, broker at H. Commcor in Sao Paulo.

Economy Minister Paulo Guedes on Thursday gave his thumbs up to the move, saying the central bank is making “good use” of its reserves, adding that selling dollars in the spot market – or “giving up reserves” – will help reduce public debt.

He also said that Brazil is “prepared” were the real to weaken past the 4.00 per dollar level to 4.10 or 4.20, an indication that he would have no problem with the central bank reducing reserves further.

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Brazil’s FX reserves were mostly accumulated during the 14 years under leftist Workers Party (PT) presidents Lula Inacio Lula da Silva and Dilma Rousseff between 2003 and 2016, when they rose to more than $350 billion from under $50 billion.