Nov. 10 (Bloomberg) -- Brazil’s currency dropped the most among major and emerging-markets currencies against the dollar on speculation the government may increase a tax on foreign purchases of stocks and bonds to stem the real’s appreciation.

The real fell 0.8 percent to 1.7117 per dollar after O Estado de Sao Paulo reported the Finance Ministry is inclined to raise the tax from 2 percent. The real has risen 0.4 percent since the government announced the so-called IOF tax on Oct. 19, adding to the 35 percent rally this year, the most among 16 major and 26 developing-nation currencies tracked by Bloomberg.

“There’s a feeling the government will not allow a strong appreciation of the real,” said Miguel Daoud, a partner at Global Financial Advisors in Sao Paulo. “They have an arsenal of tools that will not change the direction of the currency but will mitigate the climb.”

The Finance Ministry is also investigating possible loopholes used by investors to avoid paying a new tax on foreign purchases of stocks and bonds, O Estado reported, citing an interview with a government official who declined to be identified.

The Finance Ministry press office didn’t return calls by Bloomberg News seeking comment.

The government may try “administrative policies” such as allowing the Treasury to join the central bank in foreign- currency intervention and “liberalizing” the real including allowing foreigners to acquire Brazilian securities in foreign currency, JPMorgan Chase & Co. strategist Ben Laidler wrote in a note to clients last week.

‘Administrative Measures’

“Administrative measures can be announced at any moment,” said Paulo Nepomuceno, fixed income strategist at Coinvalores CCVM. ”The market is in stand-by mode.”

The government plan is ready and will probably be announced if the real closes another day under 1.7 per dollar, he said in a phone interview from Sao Paulo. The real rallied to 1.6989 yesterday, the highest since Sept. 3, 2008.

Finance Minister Guido Mantega said today the government doesn’t want foreign capital inflows to overvalue the local currency or equities, Agencia Leia wire service reported.

“We want foreign capital for direct investment, for stocks and for financial investments but without exaggeration, to make sure there will not be a bubble in stock markets or excessive valuation of the Brazilian currency,” he said at a conference in Sao Paulo, according to Leia.

Brazil’s benchmark Bovespa stock index has gained 77 percent this year, spurred by record-low interest rates and a rebounding economy. The Bovespa advanced 0.1 percent today.

‘Arsenal of Tools’

Today’s depreciation in the real reflects concern the government will step up its efforts to contain the currency now that it has strengthened to its pre-IOF level, according to a report e-mailed by 4Cast Ltd., a research company that counts central banks among its subscribers.

Until new government actions are known, the exchange rate is “unlikely to sustainably hold” under 1.7 in the near term, according to RBC Capital Markets’ head of research Nick Chamie. “While Finance Ministry and central bank officials are not denying further measures are on the way, it is unclear exactly what is in the pipeline.”

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

Last Updated: November 10, 2009 17:47 EST