Government moves to contain further devaluation of dollar against Brazilian currency

With the announcement that the European Central Bank will flood the market with 529 billion euros to succor that continent’s financial institutions, Brazilian economic authorities went into action. It is feared that as with quantitative easing in the United States, a lot of the money will eagerly head toward Brazil where the country’s base interest rate is over 10%. Yesterday, the Brazilian government moved to tighten the screws on the dollars coming in.

On one hand, it was announced that the Tax on Financial Operations (“IOF”) of 6% involving exchange rate transactions (in other words, dollars) will be extended to cover all such transactions for a three year period as of today (March 1) and expanded to include other transactions by foreigners who bring dollars into Brazil, along with operations outside Brazil in dollars – loans, especially (by Brazilians and foreigners). [the government is concerned that some “direct foreign investment” is going to Brazilian money markets]

 It should be borne in mind that this is all part of ongoing efforts to halt the devaluation of the dollar because of a ripple effect. The cheap dollar makes Brazilian exports expensive at the same time imported goods are cheaper. The result is that the country’s manufacturing sector faces the possibility of becoming an endangered species.

The 6% tax, as part of the ongoing effort to stem the dollar inflow, was originally levied on operations for a  period of a year (360 days), then two years (720 days) – and now three years. Last year, the government put a tax on derivatives. And the new measures announced yesterday (February 29) show clearly that the government is trying to close loopholes in the laws on dollar transactions, threatening to levy fines and charge interest on infractions. Multinationals are one of the targets; it is suspected that they get loans abroad at practically zero interest rates and invest in Brazilian financial markets.

On the other hand, the Central Bank has been very active on both spot (“à vista”) and future dollar markets (in other words, buying heavily) to halt the fall of the dollar and keep it above R$1.70.