February 27, 2020 / 4:16 PM / 3 months ago

UPDATE 1-Brazil's real breaks below 4.50 per dollar, down more than 10% this year

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By Jamie McGeever

BRASILIA, Feb 27 (Reuters) - The Brazilian real’s relentless decline continued on Thursday, as growing investor fears over the impact of the coronavirus outbreak on Latin America’s largest economy pushed it below 4.50 per dollar for the first time ever.

The real traded as low as 4.5010 per dollar, down more than 1% on the day and bringing its losses in the first two months of the year to more than 10% to cement its status as one of the world’s worst-performing currencies against the dollar.

By mid-session in Brazil on Thursday, it had clawed back some ground to trade at 4.4750 reais per dollar.

Financial markets around the world were rocked again on Thursday by the growing coronavirus fears, with the surge in volatility and collapse in risk appetite hitting emerging markets particularly hard.

Bank of America Merrill Lynch’s Brazil economists cut their 2020 economic growth forecast for the second time in a month, to 1.9% from 2.2%, below the 2% threshold many observers say is politically sensitive for President Jair Bolsonaro and Economy Minister Paulo Guedes.

They also lowered their 2020 and 2021 forecasts for the real to 4.00 per dollar from 3.84 and 3.85, respectively.

“Positive drivers for the real have been overwhelmed by negative pressures from a stronger dollar amid risk-off sentiment and domestic growth with downside surprises,” they wrote in a note.

“The halt in the monetary easing cycle should provide some support, however the depreciation pressures given the low carry are still strong,” they added.

Brazil’s central bank dipped into the currency derivatives market on Wednesday for the third time this month, selling swaps contracts to slow or even reverse the real’s fall.

But any relief on the downward pressure on the real has been fleeting, with some traders saying it will take much more aggressive dollar selling by the central bank to have a more lasting effect on the exchange rate.

Three-month dollar/real implied volatility rose on Thursday to 10.7%, its highest in almost three months but still some way below the 14% in August last year that prompted the central bank’s first spot market dollar sales in over a decade.

Reporting by Jamie McGeever Editing by Chizu Nomiyama and Steve Orlofsky

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