Brazil Real Gains as China Measures Support Commodity Producers

  • Currency rises to week high on top trading partner's prospects
  • Rousseff said to look at tax increase for biggest earners

Brazil’s real climbed to a one-week high as efforts by China to add to growth triggered a rebound in the prices of raw materials.

“There is scope for emerging-market currencies such as the real to strengthen given the improvement in risk sentiment,” Mark McCormick, a foreign-exchange strategist at Credit Agricole SA, said from New York.

The local currency advanced after China, Brazil’s largest trading partner, pledged to accelerate construction of some major projects and reduce companies’ tax burdens. The real also gained as President Dilma Rousseff’s administration was said to be studying a tax increase on Brazil’s top earners to raise revenue and narrow an expanding budget deficit.

The real appreciated 0.5 percent to 3.8028 per dollar at 3:42 p.m. in Sao Paulo after closing Sept. 4 near the all-time low reached in 2002. Swap rates, a gauge of expectations on interest-rate moves, rose 0.02 percentage point to 14.88 percent on the contract maturing in January 2017.

The government is considering the creation of new tax bracket with a rate of 32 percent to 35 percent for the highest income earners, said an official who asked not to be identified because the discussions aren’t public. The top income tax rate is currently 27.5 percent for those who earn more than 4,665 reais ($1,222) a month. The government is also considering tax increases on automotive fuel, beverages and cigarettes, the official said.

"While these taxes would help on the margins, given that the government desperately needs to boost revenues, spending cuts would be more appropriate because public expenditures account for nearly 40 percent of the economy,” McCormick said. “Furthermore, tax hikes will increase inflation in the short term and also provide another blow to disposable income, weighing on growth.”

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