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Brazilian Real Strengthens as Mantega Rules Out Investment Tax

Brazil’s real rose after Finance Minister Guido Mantega said the government wasn’t considering taxes on foreign direct investments as he laid out a plan to stem the currency’s appreciation, easing investor concern policy makers would take stronger steps to limit capital inflows.

The real gained 0.3 percent to 1.7120 per U.S. dollar at 1:22 p.m. in Sao Paulo, after tumbling 1.3 percent to 1.7174 yesterday. It fell as much as 0.5 percent earlier today. The yield on the Brazilian interest-rate futures contract due in January 2013 fell nine basis points, or 0.09 percentage point, to 9.14 percent.

Brazil has an array of tools to curb gains in its currency as Europe, Japan and the U.S. adopt monetary policies that lead to excessive global liquidity, even as it refrains from taxing direct investment, Mantega told reporters in Brasilia today. The government said it will increase levies on local companies’ foreign loans and bonds by extending the maturity of debt subject to the tax to three years from two.

“The measures adopted are harmless,” Alfredo Barbutti, an economist at Liquidez DTVM Ltda, said by phone from Sao Paulo. “The minister said they won’t tax FDI and there’s a positive expectation for investments.”

Foreign direct investments in Brazil climbed to $67 billion last year from $49 billion in 2010 and less than $20 billion five years ago, according to central bank data.

The 6 percent tax on foreign borrowings that mature in three years or less takes effect immediately, according to a decree published today in the official gazette.

Local Manufacturers

Mantega also said the real at 1.50 or 1.60 per U.S. dollar is “bad” for the Brazilian economy. Mantega has repeatedly pledged to take all necessary steps to prevent the exchange rate from hurting local manufacturers.

Brazil resumed efforts to rein in currency gains last month, with the central bank buying dollars in the spot and forward markets. The bank also auctioned currency swaps and bought dollars in the spot market yesterday.

The government will likely rely on central bank dollar purchases as long as the real remains around the 1.70 level, but further appreciation could spur the government to use “more creative intervention mechanisms,” Marcelo Salomon, co-head of Latin America economics at Barclays Plc in New York, wrote in a research note today.

Sovereign Fund

Mantega said policy makers can also use the sovereign wealth fund to buy dollars to protect the real from excessive global liquidity.

The Brazilian government raised taxes on overseas loans and foreign-exchange derivatives last year after tripling the so-called IOF tax on foreign investors’ fixed-income purchases to 6 percent in 2010 in a bid to stem the real’s gains.

The central bank’s foreign reserves have nearly doubled in the past four years, to $355 billion as policy makers intervened to weaken the real.

Futures yields declined for a third day as new currency measures bolstered bets the central bank will continue cutting interest rates to reduce the attractiveness of Brazilian assets and stem speculative inflows, said Luciano Rostagno, chief strategist at Banco West LB in Sao Paulo.

“Speculation has been surging since yesterday that the central bank may use the drop in rates to help control the real,” Rostagno said in a telephone interview. “Even though a stronger U.S. dollar can pressure inflation, the market sees that the government is prioritizing growth.”

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