Brazil's real strengthened early on Monday as the dollar retreated from a week of gains against the euro, while stocks fell in sympathy with global exchanges.

The local currency, the real gained 0.33 percent to 2.703 per U.S. dollar.

Amid an absence of new economic data, the Bovespa index of the Sao Paulo Stock Exchange was 1.07 percent lower at 24,481 points on expectations that foreign exchanges will slip on Monday.

The real gained support from falling country risk, which slipped 4 basis points to 413 early, according to J.P. Morgan EMBI+ bond index, and declining inflation expectations.

"The market is really tracking bond prices and the euro against the dollar," Jorge Knauer, head of currencies at Banco Prosper, said.

Among domestic factors, the central bank said in a weekly market survey on Monday that inflation forecasts for the IGP-M and IGP-DI indexes were declining modestly, potentially easing concerns about the pace of domestic interest rate hikes.

Investors expect the central bank to hike its benchmark Selic rate for the fifth straight month next week in what appears to be the tail end of a monetary tightening cycle designed to curb inflation.

Traders expect the central bank to buy dollars on the spot market this week as it did during every session last week to rebuild foreign reserves. Since announcing the repurchase plan in December, Brazil has bought more than $2.5 billion under the program designed to move Latin America's largest country closer to investment grade credit ratings.

Local markets may become more volatile as the week progresses. On Tuesday, the government's statistics agency will release data on November industrial output followed by inflation results for December on Friday.

(From Reuters, January 10, 2005)