Brazil’s Real Surges Beyond 1.6 to Dollar for First Time Since August 2008

Brazil’s real strengthened beyond 1.60 per dollar for the first time since August 2008 after Finance Minister Guido Mantega said the appreciation trend is “inevitable” as he announced a tax on foreign loans to curb the rally.

The real gained as much as 1.1 percent to 1.5963 per dollar, the strongest intraday level since Aug. 7, 2008. The currency was trading at 1.5984 per dollar at 8:10 a.m. New York time.

Mantega yesterday broadened the scope of a 6 percent tax on foreign borrowing to include loans of up to two years from one year, his third attempt in two weeks to curb a currency rally that the government says is hurting local companies. The move fell short of traders’ expectations and is unlikely to prevent the real from gaining, said Daniel Ribeiro, an economist at Credit Suisse Hedging-Griffo Asset Management.

“Mantega announced a measure that has zero impact,” Ribeiro said in a telephone interview from Sao Paulo. The real’s appreciation is being driven by a rise in commodities, the difference between internal and external interest rates, and “infinite liquidity.”

Mantega said he has an “array” of tools to stem currency gains that are hurting domestic producers. Since March 29, the government has changed rules on taxes paid on foreign loans three times. Banks and companies were previously exempt from the tax on loans maturing after 90 days.

President Dilma Rousseff is facing increasing pressure from manufacturers to curb currency gains to help them compete against a flood of cheaper imports from China, whose currency is pegged to the dollar.

‘Inevitable’
Mantega said the currency’s strength was, to some extent, “inevitable” due to the economy’s growth.

His statement demonstrates that the government is acknowledging there’s a limit to curbing the real’s appreciation, Jankiel Santos, chief economist at Espirito Santo Investment Bank, said in a report.

“It sounds like an acknowledgment the authorities may try soothing BRL appreciation, but they can’t curb it, regardless of menaces of additional measures,” Santos wrote in a report entitled “Givin’ up.”

The real has rallied 38 percent against the U.S. dollar over the past two years.

“All the measures we’ve taken have produced results,” Mantega said, adding that the real could have strengthened to as high as 1.50 per U.S. dollar in the absence of the currency curbs. “If we hadn’t acted, then certainly the real would be much more highly valued than it is now.”

Barclay’s ‘Skeptical’
The currency will likely trade at 1.50 to 1.60 per dollar “in the near term” after the government signaled it may accept currency gains that help control inflation, analysts at Barclays Capital wrote in a report to clients dated yesterday. The bank previously forecast the currency would trade at 1.65 to 1.75 reais per dollar.

“We are skeptical that these new measures will contain the recent trend,” Guilherme Loureiro, a Sao Paulo-based economist at Barclays, wrote in the report. “Moreover, we believe the government is now willing to accept a stronger real to help fight inflation.”

Economic Growth
Brazil is stepping up its efforts to fight capital inflows driven by the highest inflation-adjusted interest rates in the Group of 20 nations and near-zero borrowing costs in the U.S. and Europe. Economic growth that last year reached 7.5 percent, the fastest in over two decades, is also lifting the currency.

“The measure is likely to be ineffective to discourage capital inflows and avoid a further appreciation of the Brazilian real,” said Paulo Leme, chief Latin America economist at Goldman Sachs Group Inc., in an e-mailed report.

Mantega kicked off what he called Brazil’s response to the global currency war in October by tripling to 6 percent a tax on foreigners’ purchase of fixed-income assets.

Pressure has been mounting on Rousseff to take additional steps as manufacturers complain about a flood of cheaper imports from China.

Rousseff travels to China next week for a state visit and to attend a summit of leaders from Brazil, Russia, India and China, the so-called BRIC nations.

Brazil’s 11.75 percent benchmark interest rate compares with 8 percent in Russia and 6.25 percent in Turkey.

Brazil is expected to raise its Selic rate to 12.25 percent by year end to fight inflation expected to reach 6.02 percent, according to the median estimates in an April 1 central bank survey of economists. Brazil targets inflation of 4.5 percent, plus or minus two percentage points.

Brazil’s economy is expected to attract a record $55 billion in foreign direct investment this year, according to central bank estimates.

Developing economies will expand 6.5 percent this year compared with 2.5 percent growth in developed economies, according to an International Monetary Fund forecast published in January.

Brazil’s economy will grow 4 percent this year, according to the median estimate in a central bank survey of economists.