MercoPress. South Atlantic News Agency

Brazil again ups tax on incoming capital; calls for end to the “currency war”

The so-called IOF tax on inflows will climb to 6% from 4%

Brazil increased taxes on foreign investments in fixed-income securities for the second time in a month and Finance Minister Guido Mantega said countries trying to defend exports must end the “currency war.”

The so-called IOF tax on foreign inflows will climb to 6% from 4%, Mantega told reporters Monday in Sao Paulo. The government will also close a loophole that allowed investors to avoid the tax on some margin deposits for transactions in futures markets.

The moves aim to curb foreigners’ appetite for short-term investments and curb the dollar inflows that have contributed to the Real 7.1% gain in the past three months, the biggest among major Latin American currencies.

Investors are putting money into developing countries such as Brazil amid near-zero interest rates in the US, Japan and the Euro region, which have fuelled demand for higher-yielding assets.

The Real weakened 0.5% Monday to 1.6750 per US dollar, before Mantega’s announcement. The currency has gained 1.4% since October 4, when Mantega doubled the IOF tax on foreign investment in fixed-income securities to 4%.

The measures will go into effect once they’re published in the country’s official gazette, as soon as Tuesday.

Countries from China to Japan are seeking to restrain their currencies to gain a trade advantage, roiling financial markets and prompting Mantega to last month warn of a worldwide “currency war.” European Central Bank President Jean-Claude Trichet said Sunday that volatility in foreign-exchange markets is “counterproductive.”

“This currency war needs to be deactivated” Mantega insisted on Monday.

Mantega said other measures to stem the Real appreciation could be taken, and existing programs may be expanded if needed. The higher taxes will only affect new flows of money into the country, not deposits already in Brazil.