(Adds comments from central bank source)
By Alonso Soto and Patricia Duarte
BRASILIA/SAO PAULO, March 17 (Reuters) - Brazil's central bank said on Thursday it would scale back interventions in the foreign exchange market after the country's currency rallied to near its strongest levels in more than half a year, reducing demand for hedging by local investors.
The central bank said in a statement it would reduce the intensity of its daily currency swap auctions due to a window of opportunity offered by the current international economic outlook. It did not offer details on the scale of the shift.
The decision was due in part to signals from the United States Federal Reserve that curtailed expectations of interest rate hikes, which had been strengthening the U.S. dollar, according to a central bank source.
The source, who was not authorized to speak publicly about the decision, also pointed out that demand for swaps was lower with the currency at its current level.
The Brazilian real has rallied 10 percent this month on the U.S. Fed's dovish signals and rising bets that President Dilma Rousseff's government could soon be replaced by a more market-friendly administration.
The real gained nearly 3 percent on Thursday, to trade at 3.64 per dollar, outperforming other Latin American currencies, as a mounting political crisis threatened to oust the leftist Rousseff.
A Reuters poll on Thursday showed 11 out of 17 economists believed Brazil's central bank should start to reduce its intervention by rolling over 30 percent to 97 percent of its outstanding swap contracts.
The central bank has about $110 billion in outstanding currency swaps on its books, contracts which offer protection from sharp currency devaluations and were in high demand last year as the exchange rate hit record lows near 4.25 per dollar.
Some analysts have criticized the central bank's costly currency strategy. The bank had been fully rolling over the stock of currency swaps for several months. (Reporting by Alonso Soto and Patricia Duarte; Writing by Silvio Cascione and Brad Haynes; Editing by Tom Brown)