Brazil’s Real Leads Emerging-Market Declines Amid Fiscal Concern

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Brazil’s real led emerging-market losses as fiscal concern and speculation that the Federal Reserve will raise U.S. interest rates made the currency less attractive to investors.

The real fell 1.8 percent to 3.0942 per dollar at the close of trade in Sao Paulo, the worst performance among 24 developing-nation currencies. The local tender was down 3.1 percent since May 15, the biggest weekly decrease since March.

The currency dropped as a delayed vote in the Senate on a reduction in jobless benefits posed a setback to Finance Minister Joaquim Levy. The government is stepping up efforts to avoid a junk credit rating by raising taxes on banks and freezing spending.

“There are uncertainties regarding the fiscal adjustment,” Jessica Strasburg, an economist at CM Capital Markets in Sao Paulo, said by telephone. “The acceleration of core inflation in the U.S. increases expectations of a rate hike there, which would make emerging-market assets less attractive.”

In the U.S., a report showed that consumer prices excluding food and fuel rose at the fastest pace in two years. That added to speculation the Fed is moving closer to increasing borrowing costs.

The real extended its decline Friday after Fed Chair Janet Yellen said she still expects policy makers to raise interest rates this year if the economy meets her forecasts, with a gradual pace of tightening to follow.

Finance Tax

Brazil’s government said Friday it will freeze 69.9 billion reais ($22.6 billion) in expenditures from this year’s budget. The cuts, which don’t require congressional approval, are designed to help Levy meet a budget surplus this year equivalent to 1.2 percent of gross domestic product, excluding interest payments.

“There was not a surprise from what was expected, the numbers came in line with what the market was forecasting,” Joao Medeiros, a director at currency brokerage Pioneer Corretora de Cambio in Sao Paulo, said in a telephone interview. “The big concern remains the same we had before: will it be achieved?”

Banks, brokerages and credit-card processors in Brazil will pay a 20 percent tax on profits, up from 15 percent, under a presidential decree published Friday in the official gazette and subject to congressional approval. Banco Bradesco SA said in a research note that the measure will boost tax income by 5 billion reais and that Brazil will probably meet its fiscal surplus target for 2015.

Swap rates, a gauge of expectations for Brazil’s borrowing costs, declined 0.09 percentage point to 13.27 percent on the contract maturing in January 2017 and are down 0.12 percentage point since May 15.

The central bank is expected next week to determine how much of currency swaps it will roll over in June after it reduced the amount for this month and halted sales supporting the real in March. Brazil extended the maturity on contracts worth $392.9 million Friday.