Real Erases Gain as Concern Global Economy Slowing Saps Demand

Brazil’s real fell as concern the global economy is slowing overshadowed a newspaper report that the Latin American nation’s government may remove a financial tax on overseas loans.

Interest-rate futures yields declined for a sixth day as President Dilma Rousseff said there is no technical reason for Brazil to continue having high interest rates. The real fluctuated earlier after U.S. retail sales fell for a second month and borrowing costs rose at auctions in Germany and Italy.

“The environment abroad continues to be bad,” Italo Abucater, the head of currency trading at Icap do Brasil DTVM, said by phone from Sao Paulo.

Brazil’s currency weakened 0.2 percent to 2.0727 per U.S. dollar today in Sao Paulo after earlier gaining as much as 0.8 percent. The yield on the Brazilian interest-rate futures contract due in January 2014 fell four basis points, or 0.04 percentage point, to 8 percent. It earlier touched a record low 7.99 percent.

Brazil had net inflows of $843 million this month through June 8, following a $2.69 billion outflow in May, according to central bank data released today.

The real rose earlier as O Globo newspaper, citing an interview with Finance Minister Guido Mantega, reported that the government may eliminate the financial transactions tax, known as IOF, on overseas loans maturing in less than five years if the international crisis worsens.

Exchange Rate View

The exchange rate is favorable now, and the government wants it to stay at the current level, Mantega told the Rio de Janeiro-based newspaper. A Finance Ministry official, who asked not to be identified in accord with internal policy, confirmed Mantega’s comment.

Brazil extended in March a 6 percent tax on foreign loans and bonds issued abroad by local companies to include lending with a duration of as long as five years.

The tax was one of a series of measures taken to weaken the real and protect exporters from what Rousseff dubbed “a monetary tsunami” unleashed by rich nations seeking to devalue their currencies.

Mantega’s comment “indicates that the government currently does not want the real to depreciate significantly more,” Bernd Berg, an emerging-market strategist at Credit Suisse Group AG’s private banking unit in Zurich, said in a telephone interview.

The real rallied 24 percent from the end of 2008 through 2011, making it the best performer among emerging-market peers in the period. It has dropped 9.9 percent this year.

U.S. Retail Sales

The U.S. Commerce Department reported that retail sales fell 0.2 percent in May following an identical decline in April that was previously reported as a gain.

Brazil’s policy makers lowered the target lending rate by a half-percentage point to a record low 8.50 percent last month and signaled they will reduce the benchmark Selic further as a fragile global economy damps inflation.

“I do not have and will not have the intention of reducing rates by decree,” Rousseff said at an event in Rio de Janeiro. “But I am going to continue saying that there is no technical reason to keep rates high in the country for so long as time.”

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net

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

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