UPDATE 1-Markets question reasons behind Brazil's first FX intervention under Lula

(Recasts throughout)

By Luana Maria Benedito

SAO PAULO, April 2 (Reuters) -

Market participants on Tuesday questioned the reasons behind the decision by Brazil's central bank to intervene in the foreign exchange market through an additional auction of swap contracts after the local currency's recent slide against the dollar.

Some believe the monetary authority was only acting to meet demand created by the redemption of a dollar-linked bond, but others see that as the official motive for a move aimed at taking some pressure off the Brazilian real.

The central bank announced the extra swap auction late on Monday, saying it would offer up to 20,000 additional contracts worth $1 billion, which ended up fully sold on Tuesday.

The entity said its goal was to "maintain the regular functioning" of the market given the April 15 maturity date for the 18.53 billion-reais ($3.67 billion) NTN-A3 bond initially marketed in 1997.

The announcement, however, came as the Brazilian real weakened 1.57% against the greenback in the past two days, ending Monday's trading session at its lowest since October 2023.

It also marked the first foreign exchange intervention carried out by the central bank since President Luiz Inacio Lula da Silva took office in January 2023.

"This intervention has nothing to do with the strong rise (of the dollar against the real) yesterday," Correparti Corretora analyst Guilherme Esquelbek said. "It is related to meeting a specific demand."

But some disagreed, with StoneX market intelligence analyst Leonel Mattos noting that the central bank could have carried out the intervention on any day between April 2 and 15.

"The fact is that the recent depreciation of the real must be worrying the central bank, which is actually seeking to contain a more significant upward movement (of the dollar) and reduce exchange rate volatility."

The Brazilian real strengthened as much as 0.72% on Tuesday before reversing gains and trading near flat by midday.

Some market players did not rule out similar moves by the central bank in coming days, as Tuesday's auction did not cover the full batch of NTN-A3 bonds due this month.

Alfredo Menezes, a partner at asset manager Armor Capital, questioned why the central bank had decided to auction $1 billion if it was widely known that bonds amounted to some $3.6 billion.

"This weakens the thesis that the central bank is worried about the dollar," Genial Investimentos strategist Roberto Motta added. "Will it auction the remaining $2.6 billion?"

($1 = 5.0518 reais) (Reporting by Luana Maria Benedito; Additional reporting by Fabricio de Castro; Writing by Gabriel Araujo; Editing by Andrea Ricci)