Franco, seen as a principal architect of Brazil's economic recovery over the last four years, is to be succeeded by the bank's director of monetary policy, Francisco Lopes.

The bank now will pursue a more flexible policy regarding currency and interest rates, Franco said, effectively devaluing the Brazilian real, valued currently at about 1.31 against the dollar. That's near the ceiling of the central bank's new range of 1.20 to 1.32.

The resignation and the new policy compounds the fiscal problems for Brazil. Interest rates will rise. It's the same story as Mexico back in 1995, said Miranda Xafa, a currency strategist for Salomon Smith Barney.

The real will float from here and definitely go lower," she said. Franco was the one who put his foot down against the floating currency. But Jose Barrionuevo, director of global market strategy for Lehman Brothers, said that Lopes is just as forceful as Franco on interest rate management. And that means (this) is a political blow. Clearly that's a negative, and the concern is going to be are they going to make progress on the fiscal side.