Mantega Threatens More Capital Controls to Prevent Brazil Currency Gains

Brazil’s government is ready to take additional measures to stem a rally in the currency, including placing more restrictions on capital inflows, Finance Minister Guido Mantega said.

“We can’t forget we are in a currency war,” Mantega told reporters today in Brasilia. “We’re not going to allow our American friends to melt the dollar.”

Brazil’s real pared earlier losses after Mantega didn’t announce additional measures today. The real, which dropped as much as 1.45 percent after the Finance Ministry sent an e-mail saying Mantega would talk about the currency, fell 0.9 percent to 1.6620 per U.S. dollar at 2:51 p.m. New York time.

Mantega said the government has an “infinite” number of tools at its disposal to affect the country’s exchange rate and support exporters hurt by the currency gains. Past measures including last year’s tripling to 6 percent of the IOF tax on short-term capital inflows have been “effective,” he said.

Mantega said the government will use tax and trade measures to ensure this year’s trade surplus remains near the “not so bad” result of $20 billion reported in 2010. Brazil’s trade surplus narrowed 20 percent last year from 2009 as a stronger currency and the fastest economic growth in more than two decades fueled imports.

Spending Cuts

The government is working on a plan to announce “considerable” spending cuts, he said. The reductions will open room for the central bank to lower interest rates at the “adequate” time, reducing pressure on the real, Mantega said.

President Dilma Rousseff will veto any attempt by Congress to increase the minimum wage above 540 reais ($324), a move that would compromise the government’s efforts to cut spending and could fuel faster inflation, Mantega said.

Brazil will protect “the country from unfair competition and from the indiscriminate flow of speculative capital,” Rousseff said in her inaugural speech Jan. 1.

The real gained 39 percent since the end of 2008, the third best performer after the Australian dollar and the South African Rand amid the 16 most-traded currencies tracked by Bloomberg.

Mantega’s threats to step up intervention in the currency market comes a day after Chile’s central bank announced a plan to buy $12 billion in the foreign exchange market to weaken the peso.

The dollar advanced today against it major counterparts as a drop in stocks and crude oil from a two-year high encouraged demand for the greenback’s safety.

IntercontinentalExchange Inc.’s Dollar Index, used to track the greenback against the currencies of six major U.S. trading partners including the euro, yen, pound and Canadian dollar, increased 0.4 percent to 79.447 from 79.127 yesterday. Last year the U.S. currency gained 1.5 percent, the index shows.

To contact the reporter on this story: Arnaldo Galvao in Brasilia Newsroom at agalvao1@bloomberg.net; Andre Soliani in Brasilia at asoliani@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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