Brazil Said to Consider Applying Tax on Foreign Buying of Currency Futures

Brazil is considering introducing a tax on foreigners’ purchases of local currency futures contracts in a bid to contain a rally by the real, a government official with knowledge of the plans said. The currency strengthened, as traders reduced bets on more severe measures.

The government would introduce the so-called IOF tax on foreigners’ purchases in the local derivatives market only after studying the impact of the central bank’s decision July 8 to raise reserve requirements on short dollar positions, said the official, who cannot be named because he is not authorized to speak publicly on the matter.

The official said President Dilma Rousseff remains more concerned about fighting inflation than about the strength of the real. Rousseff will proceed with caution before adopting any new measures because there’s no consensus within the government about how to reduce pressure on the currency, the person said.

The real strengthened on the news, as traders reduced bets that the government would take even stronger measures, said Hideaki Iha, a currency trader at Fair Corretora de Cambio e Valores in Sao Paulo.

“The market doesn’t believe the government is going to act forcefully,” Iha said in a telephone interview. “The government’s priority is inflation.”
Rising Real

Brazil’s currency last week rose to its strongest level since 1999 as investors increased demand for higher-yielding assets amid easing concern over Greece’s debt crisis. The real has gained 47 percent against the U.S. dollar since the end of 2008, the most among 25 emerging market currencies tracked by Bloomberg. The real rose 0.3 percent today, reversing earlier declines, to 1.5751 per U.S. dollar at 2:44 p.m. New York time.

The measure will fail to weaken the real if it is implemented, just as several other measures over the last year have failed, said Jankiel Santos, chief economist at Espirito Santo Investment Bank.

“They are trying to avoid something that is unavoidable,” Santos said, speaking by phone from Sao Paulo. “It’s not an appreciation of the Brazilian real, it’s a weakening of the dollar. It’s just like trying to mop up ice, as we say in Brazil.”

Finance Minister Guido Mantega has repeatedly accused rich nations of provoking a “global currency war” by keeping interest rates close to zero, causing a flood of liquidity into emerging markets. Mantega told reporters in Paris last week that the currency war is still in progress.
Reserve Requirements

The central bank last week changed currency rules to reduce banks’ exposure to bets against the dollar. Banks have until July 15 to meet new requirements that they deposit 60 percent of short dollar positions over $1 billion at the central bank. The new rule amends a regulation announced in January that required banks to pay deposits on short positions above $3 billion.

On March 29,Rousseff’s administration increased to 6 percent a tax on new corporate loans and debt sales abroad by banks. A few days later, she applied the higher tax to renewed, renegotiated, or transferred loans of up to two years in length. Companies previously paid a 5.38 percent tax on loans up to 90 days and zero tax when the operation exceeded three months. In October, Mantega tripled to 6 percent a tax on foreign investors’ fixed-income purchases.

Since April, inflation has exceeded the 6.5 percent upper limit of the central bank’s target range. Consumer prices rose 6.71 percent in June from a year earlier, the fastest pace since 2005. The government targets inflation of 4.5 percent, plus or minus two percentage points.