Brazil Charges Tax on Bets Against Dollar in Futures Market

Brazil imposed a tax on bets against the U.S. dollar and warned it may boost intervention in the nation’s derivatives market in a bid to weaken a currency that reached a 12-year high this week. The real declined by the most in almost three months.

As part of a new round of currency measures unveiled today, the government levied a 1 percent tax on short dollar positions in the country’s futures market above $10 million in notional value. The government may increase the tax up to 25 percent if needed, according to the decree signed by President Dilma Rousseff and published today in the Official Gazette.

Finance Minister Guido Mantega said that the measures give the government a “bigger arsenal” of tools to defend itself from “speculation” that the real will continue to rally amid global economic uncertainty.

“We’re reducing the advantages enjoyed by speculators, and we expect the real will weaken or stop appreciating,” Mantega told reporters in Brasilia. “If we hadn’t taken these measures we’d have an exchange rate who knows where, hurting exporters and domestic production.”

The measures, the latest attempt by policy makers to ease capital inflows behind a 48 percent rally in the real since the end of 2008, are unlikely to reduce the attractiveness of Latin America’s biggest economy to foreign investors, said Jankiel Santos, chief economist for Espirito Santo Investment Bank in Sao Paulo.

“There’s an excess of dollar coming to Brazil, and you may limit part of that in terms of portfolio flows, but I’m not sure the structural balance is going to change at all,” Santos said in a telephone interview.

Record FDI

Investment is pouring into Brazil as the nation develops offshore oil finds and prepares to host the 2014 World Cup and 2016 Summer Olympics. Foreign direct investment jumped to a record $69 billion in the 12 months through June, the central bank said yesterday.

Even as Brazil takes the lead among regional governments trying to deter inflows fueled by near-zero interest rates in the U.S., the country’s current account gap narrowed in June to $3.3 billion, its smallest in 10 months, as high prices for commodity exports offset a surge in imports.

Latest Moves

Policy makers in Latin America’s biggest economy have taken steps to ease capital inflows to stem a rally in the real, which yesterday traded at its strongest level since Brazil abandoned its peg to the dollar in 1999.

Since last year, the government has tripled a tax of foreign purchases of domestic bonds, increased reserve requirements on short-dollar positions and raised levies on foreign loans.

Today’s measures, while applicable to all investors, will primarily affect foreign investors who hold the bulk of about $25 billion in bets against the dollar on Sao Paulo’s future exchange, said Nelson Barbosa, executive secretary at the Finance Ministry.

Barbosa said the tax will stem the currency’s 49 percent rally since the end of 2008 because the bulk of pressure against the currency comes from futures market, which dwarfs the size of the spot currency market. No additional currency measures are expected to be announced at tomorrow’s meeting of the monetary council, which is comprised of officials from the central bank, finance ministry and budget ministry, he added.

Hedging Costs

While the measures will raise hedging costs for exporters, the increase will be offset by a weaker real, said Barbosa. Short dollar positions held before today can be rolled over without paying the tax, Barbosa said.

The real declined 1.7 percent, to 1.5656 per dollar, at 12:33 p.m. New York time, the biggest drop since May 4. The real has rallied the most 25 emerging market currencies tracked by Bloomberg since the end of 2008.

Central Bank President Alexandre Tombini said the measures, which the monetary authority helped design, will strengthen the financial system.

“It’s a measure we’ve been discussing to reducing hedging against the dollar and in favor of the real during this time and period when we have ample global liquidity,” Tombini told reporters in Rio de Janeiro.

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