Government sources told Reuters that President Dilma Rousseff will -- at least in the short term -- tolerate the real's rise to a 31-month high rather than try to fight it with major new capital controls, taxes or other measures.
"The attitude for now is to wait and see," said one of the officials, speaking like others on condition of anonymity. "We don't have any good options."The real strengthened further on Friday after the officials' comments were published, firming 1.16 percent to about 1.61 per dollar, its strongest level since August 2008.
The dilemma Rousseff faces illustrates how policymakers throughout the emerging market world may be running out of easy solutions to deal with their strong currencies. Brazil's robust economy and double-digit interest rates have made it an especially juicy target as investors from the developed world, where rates are extremely low, seek high yields elsewhere.
Rousseff's government had previously defended the real at the unofficial threshold of 1.65 per dollar, implementing new intervention measures such as taxes on foreign bond purchases when the currency threatened to strengthen beyond that level.
Yet the real burst through that barrier this week. It closed the week 3 percent stronger, and is now up more than 40 percent since 2009. The real's rise hurts some local manufacturers, a major Rousseff constituency. But her economic team has decided to hold off for now on any major new intervention measures, believing that a slightly stronger currency could help act as a brake on rising inflation and ease the threat from higher global oil prices, the officials said.
Officials are also worried that any of the potential capital controls still at their disposal would carry negative side effects by curtailing productive investment from abroad. One official compared the measures still available to choosing a stronger set of chemotherapy drugs to deal with cancer. "You have to be careful," the official said.
Rousseff could shift strategy quickly and implement severe new controls if the real continues to strengthen, the officials warned. They also said the central bank would continue its regular interventions in the currency market to limit the real's rise as much as possible.
OIL PRICES A BIG CONCERN: The officials declined to specify what the new unofficial threshold for the real is. But their comments amount to a decision to retrench just above the 1.60-per-dollar level as the torrent of speculative and long-term capital flowing into Brazil shows no sign of abating soon.
Recent measures aimed at curtailing the inflows have had diminished results. Brazil on Tuesday raised a tax on foreign borrowing for loans of up to 360 days, but the effect on the foreign exchange market was practically nil.