Brazilian currency rises from four-year low after tax eliminated

Brazil’s real rose from a four-year low after the government removed a 1% tax charged on wagers against the dollar in the futures market.

The currency appreciated 0.6% to 2.1431 per U.S. dollar at 10:33 a.m. in Sao Paulo after falling yesterday to 2.1564, the weakest level since May 2009. Swap rates on the contract due in January 2016 dropped five basis points, or 0.05 percentage point, to 10.30%.

“The central bank is doing everything they can, basically,” Jarratt Davis, a currency consultant at Smile Global Management, a unit of Independent Portfolio Managers Ltd., said in a phone interview from London.

The government removed the tax after four currency swap interventions this week weren’t enough to stem the real’s decline. The levy’s removal follows last week’s elimination of the tax, known as IOF, on foreign investors who buy Brazilian bonds in the domestic market.

Brazil is unwinding capital controls that it began putting in place in 2010 to defend itself from policies Finance Minister Guido Mantega then characterized as a currency war. The dollar has strengthened worldwide amid speculation the U.S. Federal Reserve will curtail its bond-buying program, Mantega told reporters yesterday.

“With the dollar strengthening, it doesn’t make sense to keep this obstacle in place,” Mantega said. “We are reducing the IOF so there will be greater supply of the dollar in the futures market.”

Bond Tax

He scrapped on June 5 the 6% tax on foreign investment in bonds purchased in the Brazilian market. The real still continued to slide, and on June 10 and June 11 the government offered foreign-exchange swap contracts worth $3.86 billion in four auctions.

The tax measure probably will have a limited impact on the exchange rate, Barclays Plc analysts Guilherme Loureiro and Marcelo Salomon wrote in a note e-mailed to investors yesterday.

“Negative global conditions and growing fiscal concerns locally should continue to dominate flows,” they wrote.

Policy makers responded to accelerating inflation by raising the benchmark interest rate to 8%, after keeping borrowing costs at a record low 7.25% from October to March.

The target rate was lifted 50 basis points on May 29, surprising 38 of 57 analysts who expected policy makers would raise borrowing costs by 25 basis points for a second consecutive time.

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