World's strongest currency? Get real.

Real Makes Brazil Dollar Beater, Haven for Capital by Adriana Brasileiro and Alexander Ragir

[T]he real strengthened as much as 1.1 percent on Feb. 1, its biggest rally since September. The gain is the latest spurt in a four-year, 71 percent advance that made it the world's best-performing currency against the dollar. This year, the real has risen against every one of 70 currencies tracked by Bloomberg except Iceland's krona and Thailand's baht.

A boom in exports of orange juice, sugar, coffee, soybeans and iron ore, as well as interest rates at 12.9 percent, are luring investors to the real. The currency gained 0.6 percent today to 2.0932 reais per dollar, its strongest since May.

Demand for the currency has risen as international investors buy the country's debt. Yields on one-year benchmark government securities are 7.35 percentage points more than comparable U.S. Treasuries and 8.48 points higher than German bunds.

Brazil's benchmark local-currency, zero-coupon bond due January 2008 returned 18.2 percent during the past 12 months. Converted into dollars, the bonds returned 24.8 percent

The higher yields have made Brazil popular with investors borrowing in Japanese yen -- where the benchmark lending rate is 0.25 percent -- and reinvesting in real debt, the so-called carry trade. Foreign investors boosted holdings of real debt more than five-fold last year to 38.4 billion reais ($18 billion).

Flows of funds into Brazil have overwhelmed central bank efforts to contain the currency's advance. Banco Central do Brasil has sold reais for dollars every day since July. That has pushed foreign reserves to a record high of $91.6 billion from $56.8 billion a year ago and $32.4 billion in June 2002.

The steady gains in the currency over such a long period are unusual in Brazil, a country that has had eight currencies since World War II and suffered a 35 percent plunge in the real as recently as 2002. The real is now less volatile than the Norwegian krone and New Zealand dollar, based on prices quoted by options traders.