Jan. 21 (Bloomberg) -- Brazil's currency may strengthen as increasing inflows from bond sales and exports outpace dollar purchases by the Brazilian central bank.

``The trend for the dollar is to fall because of the funds entering the country,'' said Cristiano Mendonca, head of the currency, interest rate and commodity contract trading desk at Espirito Santo Securities in Rio de Janeiro in a Bloomberg News television interview. ``I don't think the central bank is buying great quantities of dollars to prevent it from falling.''

Brazilian companies and the government have sold or announced sales of bonds overseas of more than $3 billion this month, taking advantage of international investors' appetite for higher yielding emerging market debt. Brazil's trade surplus rose to $324 million last week from $298 million in the week before, the trade ministry said Monday, after South America's largest economy posted a record $25 billion surplus in 2003.

Brazil's real was little changed at 2.8380per dollar in Sao Paulo at 7:38 a.m. New York time from 2.8375, a one-week low. The currency has gained 1.9 percent this year, the fifth-best performance against the dollar among the 16 most-traded currencies.

Dollar Auctions

The central bank has been buying dollars daily since Jan. 8 in the spot market to boost its international reserves. Traders such as Mario Battistel, head of currency trading at Novacao Corretora de Cambio SA in Sao Paulo, say the government is probably buying about $100 million a day.

Mendonca said the purchases by the central bank have signaled to investors the bank won't let the real strengthen below 2.8 per dollar.

While the bank yesterday bought dollars at one auction at a maximum 2.8380 reais to the dollar, it has called as many as three auctions in one day, as recently as Jan. 15.

The bank does not release purchase amounts. It has said it is buying dollars to boost its foreign-exchange reserves, which fell $28 million to $49.639 billion yesterday.

Rate Decision

The bank's monetary policy committee today will announce its benchmark overnight Selic target lending rate for the next month.

The bank will cut its target rate for an eighth consecutive month, lowering the Selic to 16 percent from 16.5 percent, according the median estimate of 33 economists surveyed by Bloomberg News.

The benchmark interest rate stood at 26.5 percent in June.

Yesterday, the bank announced that it would not refinance about $2.5 billion of contracts used by investors to guard against declines in the value of the real that mature on Feb. 2.

The U.S. dollar contract for Feb. 2 settlement, the most traded on Sao Paulo's BM&F commodities and futures exchange, fell 0.1 percent to 2.8485 reais to the dollar.

Interest rate futures rose for a third day. The futures rate on one-day bank deposits for July delivery, the most-traded on the BM&F, added 5 basis points to 15.340 percent from 15.289 percent yesterday. The contract indicates investor expectations for the end of June. A basis point equals 0.01 percentage point.

Brazil's benchmark 8 percent bond maturing in 2014 was unchanged at 100.38, leaving the yield at 7.90 percent, according to J.P. Morgan Chase & Co. at 7:32 a.m. New York time.

The government though has the right to repurchase the debt at face value on April 15, an option that effectively limits the bonds upper price to 100, said Mario Mesquita, chief economist at the Sao Paulo unit of ABN Amro Bank NV. As a result, trading is increasing in the country's 11 percent bond maturing in 2040.

The 2040 bond rose for a second day, adding 0.35 cent to 115.85, causing the yield to fall to 8.79 percent, according to J.P. Morgan Chase & Co.

Last Updated: January 21, 2004 07:40 EST