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Brazil's Real Rises as Fed Cut Boosts Local Yield Advantage By Alex Lange and Telma Marotto March 18 (Bloomberg) -- Brazil's real strengthened the most in almost two months as the Federal Reserve's cut in the benchmark U.S. lending rate boosted the yield advantage of local fixed-income securities. “The market outlook for the real in the short term is positive,” said Tony Volpon, chief economist at CM Capital Markets in Sao Paulo. “If it's positive for the currency, it's going to be positive for fixed income.” The real rose for the first time in four days, increasing 1.95 percent to 1.6891 BRL/USD at 3:30 p.m. New York time, from 1.7226 BRL/USD yesterday. It's the biggest gain since Jan. 24, two days after the Fed made an emergency cut in the target rate. The currency dropped 0.6 percent yesterday after the Fed, in an emergency weekend decision, cut the rate on direct loans to commercial banks and opened up borrowing at the rate to primary dealers in government securities. The Fed also brokered the purchase of Bear Stearns Cos. by JPMorgan Chase & Co. Fed policy makers today cut the benchmark U.S. interest rate today by three-quarters of a percentage point to 2.25 percent to support financial markets. Brazil's currency gained even as the country's central bank bought U.S. dollars in the spot market, part of a strategy to increase international reserves and slow the real's gains. The bank bought dollars for 1.7059 BRL/USD apiece in an auction. Volpon predicted the Brazilian central bank will be forced to raise its benchmark interest rate 50 basis points, or a half- percentage point, to 11.75 percent as domestic demand increases for foreign goods. Real's Gain The real has gained 23 percent against the dollar over the past 12 months as rising commodity exports and purchases of local financial assets swelled dollar inflows. “There's a certain demand for commodities that will not cool down in the short term,” said Ian Cao, who helps manage about BRL 3 billion (USD 1.78 billion) in assets as a fixedincome manager at Rio de Janeiro-based Icatu Hartford. “That makes us confident in the capital inflows.” Brazilian exports rose to USD 3.5 billion in the week ended March 16 from USD 3.3 billion the previous week, the government said yesterday. The trade surplus in the week reached USD 527 million. Commodity exports may reach USD 100 billion this year, a 33 percent increase from 2007, the Folha de S. Paulo newspaper reported on March 16, citing specialists it didn't name. Brazil's economy hasn't been hurt by the deepening international credit squeeze, Finance Minister Guido Mantega said yesterday. `Safe Harbor' “Brazil is a safe harbor,” Mantega told reporters in Brasilia yesterday. The benchmark lending rate is 11.25 percent, 9 percentage points above the Fed's overnight target. The yield on Brazil's overnight interest-rate futures contract for January delivery held today at 12.22 percent, almost 1 percentage point above the target rate. Brazil's central bank is scheduled to discuss interest-rate policy on April 15. The yield on Brazil's zero-coupon bond due in January 2009 fell 9 basis points, or 0.09 percentage point, to 12.25 percent, according to Banco Votorantim SA. Latin America Currencies Peru's sol jumped 0.5 percent to 2.803 PEN/USD from 2.816 PEN/USD yesterday. It touched 2.8027 PEN/USD , its strongest level since March 1998. The central bank bought USD 126 million in the foreign exchange market in a bid to ease gains in the sol. The yield on Peru's 8.6 percent sol-denominated bonds due in August 2017 was little changed at 6.58 percent, according to Banco BBVA Continental. Venezuela's bolivar weakened 2.3 percent to 4.4 VEB/USD in the unregulated market from 4.3 VEB/USD yesterday, traders said. The government pegs the currency at an official exchange rate of 2.15 VEB/USD under restrictions imposed in 2003. Venezuelans turn to the parallel market when they can't get approval from the government's Foreign Exchange Administration Commission to buy dollars at the official rate. Other currency markets in Latin America also closed before the Fed decision. Chile's peso rose 0.5 percent to 431.85 CLP/USD from 434.14 CLP/USD yesterday. The yield on Chile's 6 percent bonds due in March 2017 rose 6 basis points to 6.63 percent, according to Chile's Commerce Exchange. The spread between the Chilean and U.S. benchmark lending rates, now at its widest since February 2002, has helped fuel a 15.6 percent increase in the Chilean peso this year. That's the biggest gain among 26 emerging-market currencies tracked by Bloomberg. Argentina's peso rose 0.05 percent to 3.1465 ARS/USD, from 3.148 ARS/USD yesterday. The yield on the nation's 5.83 percent inflation-linked peso bonds due in December 2033 fell 3 basis points to 9.13 percent, according to Bloomberg prices.