Brazil’s Real Regains Strength

Brazil’s devalued currency is regaining lost ground at a surprising pace, which could set the stage for another interest rate cut by the country’s central bank today.

The Brazilian currency, the real, strengthened to 1.66 per U.S. dollar Tuesday from 1.69 on Monday. The currency now is at its strongest level against the dollar since mid-January, when the government stopped defending the real and allowed it to plunge from 1.2 per dollar to a record low of 2.15 by March 3.

The devaluation occurred as foreign and domestic investors fled Brazil amid growing pessimism about its economy and the government’s massive budget deficit.

But money has returned in recent weeks, lifting the Brazilian stock market and the currency. Brazil has tapped into new financial aid from the International Monetary Fund, and on Tuesday a key economic think thank, Sao Paulo’s Fipe Institute, reduced its inflation outlook for 1999 to 9% from 12%.

That may give the central bank room to cut a benchmark short-term interest rate today from the current sky-high 39.5%. Still, traders warned of a brewing scandal involving allegations of bank insider trading ahead of the January devaluation.