Brazil took new steps on Thursday to defend itself in what it calls a "global currency war," extending a tax on foreign loans to slow down a flood of capital that is strengthening its currency. Analysts said the move was unlikely to have a major impact and the real actually strengthened in midday trade. Brazil's central bank has also recently increased interventions in the currency market, buying dollars and selling reverse currency swaps to halt the real's gains.
The real, considered one of the world's most overvalued currencies, has gained more than 8 percent so far in 2012, making it harder for Brazilian industry to compete at home and abroad. The strong real is a top concern for President Dilma Rousseff, who is taking measures to protect local industries as she strives to ensure economic growth above 4 percent this year.
Finance Minister Guido Mantega warned that further measures were possible if the real keeps strengthening. He blamed loose monetary policy in rich nations for the deluge of capital that threaten the real economies of emerging-market nations. "The government will not stand by as the currency war rages on," Mantega told reporters in Brasilia. "The government will continue taking measures to prevent the real from strengthening and hurting Brazilian production."
The new measure, contained in a presidential decree published on Thursday, extended a 6 percent tax known as the IOF on overseas loans with maturities of up to three years. Previously, the tax was only charged when companies in Brazil took out foreign loans maturing in up to two years. Analysts questioned the effectiveness of the move. The real strengthened 0.30 percent to bid at 1.7139 per dollar early on Thursday in volatile trading.
"This will have a moderate effect on the currency because the debt issuance of Brazilian companies has mostly been above 10 years," said Newton Rosa, an economist with SulAmerica Investments in São Paulo. "You have plenty of liquidity in the markets and lower risk aversion." Brazil's government has a long history of tweaking the IOF tax to try to limit or encourage capital flows into the country. Mantega said the government did not plan to raise the IOF tax on foreign purchases of local stocks, but stressed it has plenty of options at hand.
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