Brazil’s Currency Drops as Lula Faces Corruption Investigation

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Brazil’s real declined to a one-week low as federal prosecutors investigated allegations of influence-peddling by former President Luiz Inacio Lula da Silva, broadening a corruption probe that has roiled the government.

The currency erased its gain after a spokesman for the prosecutor’s office in Brasilia said the inquiry was focusing on whether Lula used his influence to win contracts in Panama and Venezuela for the construction company Odebrecht SA.

“This is adding to the political instability environment we’re living in,” said Reginaldo Siaca, a currency manager at TOV Corretora de Cambio in Sao Paulo.

The real depreciated 0.5 percent to 3.1565 per dollar at the close of trade in Sao Paulo, the weakest level on a closing basis since July 10. The real is down 29 percent over the past year, the worst performance among 16 major currencies tracked by Bloomberg.

Lula denies any wrongdoing. All the activities carried out by the former president were legal, said a spokesman at the Lula Institute, a non-profit organization, who asked not to be named citing internal rules. President Dilma Rousseff’s press office didn’t immediately reply to an e-mail seeking comment.

Allegations that construction companies including Odebrecht paid bribes to state-controlled oil producer Petroleo Brasileiro SA in return for contracts helped send the real down 16 percent this year. Odebrecht has denied wrongdoing.

The real has also fallen this year as the nation struggles with a shrinking economy, above-target inflation, the prospect of reduced demand for its exports in China and an expected increase in U.S. interest rates by the Federal Reserve.

SocGen Outlook

Societe Generale SA strategist Bernd Berg said Thursday that the real will weaken to about 3.32 per dollar in upcoming weeks, a level last seen more than a decade ago.

Efforts to curb government budget deficits and preserve the nation’s credit rating make the real “highly vulnerable to any deterioration of the external environment,” Berg wrote.

The real swung between losses and gains earlier Thursday as the Senate refrained from deciding on legislation that would help reduce budget deficits and promote inflows.

Folha de S. Paulo reported that lawmakers may wait until August to vote on the bill, which would permit the repatriation of funds to pay late taxes without criminal charges. Finance Minister Joaquim Levy urged lawmakers to pass the measure as central bankers met this week with analysts from Moody’s Investors Service, which cited fiscal challenges when it put the country on negative outlook in September.

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