Brazil takes measures to curb currency rally

Brazil's government stands ready to take further measures to curb a currency rally that is hurting domestic industry, Finance Minister Guido Mantega said today, speaking at a news conference in Brasilia, Mantega also said a new tax increase on currency derivatives will reduce profitability for speculators in financial markets.

He unveiled a potentially steep tax on foreign exchange derivatives today and threatened more to come in its latest bid to curb a currency rally that is crippling local industries, knocking the real back from a 12-year high.

The measure imposes a 1 percent tax on trading in currency derivatives that result in a net bet that the real will strengthen, while allowing for that levy to rise to up to 25 percent in the future.

The Brazilian real opened down nearly 2 percent on the news, slipping to 1.567 per dollar from yesterday, when it closed at its strongest level since January 1999. But the currency pared some of those losses to trade at 1.5660 per dollar in mid-morning.

"We are going to make speculation less profitable with all these measures," said Finance Minister Guido Mantega, speaking at a news conference. "We are in the middle of a currency war. Imagine if no measures had been taken – the dollar would be even lower." If the current tax did not have the desired effect, he added, the government would be willing to raise the levy.

Mantega was quick to stress that defensive currency hedging would not be hurt by the measure. Investors frequently use derivatives such as futures and non-deliverable forwards to make bets on the real, meaning taxes that lower the profitability of those instruments reduce the allure of Brazil's currency.

With the real trading at levels not seen since a currency crisis that brought Brazil to its knees in early 1999, the government has stepped up efforts to brake the currency.

Mantega had warned markets on Monday that "we're always ready to take measures that will stop excessive gains in the Brazilian currency ."