Sept. 29 (Bloomberg) -- Brazil's currency may gain for a third day after President Luiz Inacio Lula da Silva's candidate won election to lead the lower house.

Communist Party member Aldo Rebelo, 49, beat the Liberal Front Party's Jose Thomaz Nono in a 258 to 243 vote. The house picked a new president to replace Severino Cavalcanti who resigned Sept. 21 because of allegations he took bribes.

``It is a signal that after many months of defeat that government is able to pull one off,'' said Boris Segura, who helps manage $800 million in emerging market bonds at Standish Mellon Asset Management in Boston.

Brazil's real yesterday climbed to a four-year high on increased flows from exporters and overseas investors into South America's largest economy. The real rose 1.5 percent to 2.2272 per dollar, increasing its gain in 2005 to 18.8 percent, the best performance against the dollar among the 16 major currencies. It was the strongest level for the currency since May 2001.

Lula told leaders of his ruling coalition that Rebelo, a former cabinet minister, would be the candidate most likely to push for government legislation on labor and tax changes ahead of the 2006 presidential election, said deputy Arlindo Chinaglia, head of the governing coalition bloc in the house.

``Brazil's economic fundamentals are quite healthy and improving, and with financial markets still in a yield-hungry mode high-yielders tend to outperform,'' said Nick Chamie, head of emerging markets at RBC Capital Markets in Toronto, a unit of Canada's biggest bank by assets.

The yield to the 2015 call date on Brazil's benchmark 11 percent bond maturing in 2040 yesterday fell to 7.82 percent, while the yield to maturity fell to 8.97 percent from 9.00 percent yesterday, according to JPMorgan Chase & Co. The price, which moves inversely to the yield, rose 0.30 cent on the dollar to a record 121.60 cents.

Rebelo's win will ``solidify the gains and might put a bit back into the market,'' Chamie said. ``It would validate the current levels.''

Tensions

Tensions have grown between Lula and lawmakers since June, when congress began investigating allegations of corruption by members of Lula's Workers' Party.

``This will give Lula a little more breathing space and perhaps the corruption crisis will subside a bit more quickly,'' David Fleischer, a political science professor at the University of Brasilia said in a telephone interview. ``I expect some open faucets, because there have been a lot of promises made on budget funds being liberated.''

Rebelo's negotiating skills will allow the president to rebuild his congressional base of support, which is collapsing after members of his administration resigned amid accusations of corruption, Chinaglia said.

Paulo Leme, managing director for emerging markets at Goldman, Sachs Group Inc. said Rebelo's win is ``an important minor victory in what is a difficult political situation.''

Leme said he doesn't expect legislation stuck in Congress to be approved quickly. ``Reform approval will continue to be very slow or unsatisfactory,'' he said.

To contact the reporter on this story: Andrew J. Barden in Sao Paulo at barden@bloomberg.net

Last Updated: September 29, 2005 02:22 EDT