Brazil’s Central Bank started Wednesday (Aug 21) to auction dollars from its international reserves to hold the exchange rate in check. In the morning, $200 million were sold in cash. This type of operation had not taken place since February 2009, during the peak of the global crisis triggered by the collapse in the US subprime mortgage crisis.
The new exchange intervention strategy was unveiled on August 14. It consists of simultaneously selling cash to the market and buying the same amount in reverse swap contracts, which operate like the purchase of dollars in the future market. The Central Bank plans to sell up to $3.845 billion by August 29.
The Central Bank argued that traditional currency swaps are demanded by investors seeking to protect exchange volatility, but part of the market is requiring dollars in cash due to the economic landscape.
The new intervention system proved effective on the first day. Early this afternoon, the commercial dollar was being sold at R$4.021, down 0.76 percent.
Last week, the Central Bank had reported it was willing to sell up to $550 million a day. The demand was lower than expected, however. In addition to in-cash sales, the Central Bank on Wednesday negotiated 4 thousand reverse currency swap. The total offer comprises up to 11 thousand securities.
Th international reserves—one of the country’s most powerful tools against external impacts on the economy—currently add up to $388 billion. Should the $3.845 billion be thoroughly sold, the move will deduct slightly less than one percent of the reserves.