Brazil Real Posts Biggest Two-Week Advance Since 2009 on Tax Rule Changes

Brazil’s real posted the biggest two-week gain in almost two years after the government enacted measures to curb its rally that were weaker than some investors expected, and Finance Minister Guido Mantega said long-term appreciation of the currency is “inevitable.”

The real rose 1.1 percent today to 1.5689 per dollar at 5 p.m. New York time, adding to the currency’s 5.9 percent rally over the past two weeks. The currency gained 7.4 percent in the two-week period ended May 29, 2009. The real rallied 2.4 percent this week.

The government has changed tax rules three times since March 29 in an effort to slow the two-year, 40 percent surge in the real that’s crimping exporters’ profits. The measures were “very mild” compared to the steps traders worried Mantega would take, said Win Thin, global head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York.

“That’s pretty much a green light for the market to take the real stronger,” Thin said in a telephone interview. “They’ve kept the big guns in the bag. If you look at Mantega’s comments, you sort of realize they know it’s sort of like a losing battle. They’ll try and slow the move, but it’s getting costly.”

Mantega said April 6 the currency’s strength was, to some extent, “inevitable” due to the economy’s growth as he announced the government was broadening the scope of a 6 percent tax on foreign borrowing to include loans with maturities of up to two years from one year.

Brazil’s central bank said it bought an unspecified amount of dollars in the forward currency market today at 1.5795 reais for liquidation on May 3. Policy makers said they also purchased the U.S. currency twice in the spot market, first at 1.5770 and then at 1.5740 each. The tactics are part of an effort to curb gains in the currency, which has appreciated 48 percent since the end of 2008, the most among emerging-market currencies tracked by Bloomberg in the period.

Yields on the interest-rate futures contract due in January were unchanged at 12.25 percent.

To contact the reporter on this story: Benjamin Bain in New York at bbain2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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