Oct. 30 (Bloomberg) -- Brazil’s real posted its biggest weekly drop since February, as a new government tax on foreign investment sparked a tumble in stocks and eroded dollar inflows.

The currency fell 1.8 percent to 1.7653 per U.S. dollar at 3:14 p.m. New York time, from 1.7328 yesterday. The real dropped 2.9 percent this week, the most since the period ended Feb. 20, after declining 0.4 percent in the five-day period ended Oct. 23.

The foreign exchange depreciation in the past two weeks reflects “the uncertainty regarding the permanence of foreign investors in our stock market,” said Adilson Goes, currency trader at Fair Corretora de Cambio. “People are afraid stocks have risen too much and want to get out before anyone else does,” he said in a phone interview from Sao Paulo. Foreign appetite for Brazilian stocks “was throwing the exchange rate off balance.”

The 31 percent rise in the real this year led the government to impose a tax on foreign purchases of stocks and fixed-income securities on Oct. 20. The currency has strengthened 0.1 percent in October.

Brazil’s central bank won’t be able to effectively influence the real’s exchange rate, said Guilherme da Nobrega, an economist at Itau Unibanco Holding SA.

“If you have any really good model of where the real is going to be, go for it,” Nobrega said at a Brazilian-American Chamber of Commerce event in New York. “It is not going to be the central bank who will stop it from happening.”

Higher Operating Cost

Vanguard Group Inc. doubled the purchase fee on an emerging-market stock fund after Brazil imposed a 2 percent tax on equity purchases that drove up the cost of operating in the country.

Vanguard raised the purchase fee to 0.5 percent from 0.25 percent on its Vanguard Emerging Markets Stock Index Fund, according to a statement published on the company’s Web site.

Investors don’t want to jeopardize gains in their portfolios and got “more cautious” with Brazilian assets as the end of the year approaches, said Angela Martins, director of the international division of Banco ABC Brasil. “They are already demanding higher premiums,” she said in an interview with Bloomberg Television in Sao Paulo.

Trading Central technical analyst Cyril Berkouk predicts the real will weaken to 1.9259 against the dollar in the next three to four weeks.

‘Excessive Volatility’

“The only certainty is excessive volatility,” said Francisco Carvalho, head of currency trading at Liquidez Corretora, Brazil’s second-largest foreign-exchange brokerage. Settlement of a currency futures contract known as Ptax today, the last trading day of the month, adds to the volatility, according to Carvalho.

He estimates the real will trade between 1.7 and 1.77 per dollar in November.

Brazil’s budget deficit widened in September to a nine- month high as the government carried out its stimulus plan amid falling revenue.

The deficit, including the federal government, local governments and state companies, widened to 22.4 billion reais ($12.7 billion) from 8.16 billion reais in August, the central bank said in a report distributed today in Brasilia. Analysts expected a gap of 12 billion reais, according to the median of three forecasts in a Bloomberg survey.

In the overnight interest-rates futures market, the yield on the contract due January 2011 rose eight basis points, or 0.08 percentage point, to 10.34 percent, according to Bloomberg data.

The benchmark Bovespa Index dropped 5.7 percent this week after falling 1.7 percent in the previous week.

To contact the reporter responsible for this story: Camila Fontana at cfontana@bloomberg.net

Last Updated: October 30, 2009 15:27 EDT