EMERGING MARKETS-Brazil real sinks on tax hikes, China move

* China’s surprise interest rate hike boosts U.S. dollar

* Brazil’s real plunges 2 pct, Mexican peso loses 0.8 pct

* Analysts see no long-term effect from Brazil FX measures

* Chile’s peso sinks 1 pct as copper prices fall

By Samantha Pearson

SAO PAULO, Oct 19 (BestGrowthStock) – The Brazilian real dropped
sharply early Tuesday after interest rate hikes in China lent
Brazil’s government a hand in its fight to curb a currency
rally.

The Brazilian government late Monday raised the tax it
charges foreigners to buy local bonds and also increased the
levy on any derivatives trading they do, hoping to scare away
foreign investors the government blames for driving up the
real.

The real (BRBY: ) headed for its biggest one-day loss in more
than five months on Tuesday, sinking 1.95 percent to 1.697
reais per U.S. dollar on the local spot market.

But with gains of about 100 percent since 2003, the real is
still the world’s most overvalued major currency, according to
Goldman Sachs.

Analysts said the currency’s sharp losses against the
dollar Tuesday had just as much to do with China’s decision to
raise interest rates, adding that the increase to Brazil’s
so-called IOF tax would not keep foreigners away for long. For
details, see [ID:nSGE69I0HU]

“The currency market is reflecting what’s going on abroad
just as much as the IOF,” said Luciano Rostagno, chief
strategist for CM Capital Markets in Sao Paulo. “China’s
interest rate hike is making the dollar strengthen, which is
also causing the real to depreciate.”

The dollar’s sharp gains caused weakness across the range
of Latin America’s currency markets.

The Mexican peso (MXN=: ) dropped 0.78 percent to 12.5100 per
dollar. The Chilean peso (CLP=: ) lost 1 percent to 485.50 per
dollar as the strong greenback also pushed down the price of
copper, the country’s main export.

CALL FOR HELP

Ahead of this week’s G20 finance ministers’ meeting in
South Korea, Brazil’s finance minister, Guido Mantega, also
called for international action on Monday, saying Brazil could
not fight the global “currency war” alone.

A weak U.S. dollar and low interest rates across much of
the developed world have attracted a flood of money into
emerging economies, forcing countries from Colombia to Thailand
to intervene in their currency markets.

“It is natural for there to be a reaction after the IOF,
but the measure will only have a very short-term effect,” said
CM Capital Markets’ Rostagno. “The overriding trend in the
global context is the depreciation of the dollar due to the
expectation of an injection of funds (by the U.S. Federal
Reserve).”

Speculation has mounted that the U.S. Fed will decide soon
to pump more money into its struggling economy. Such a measure
could keep the dollar weak and yields on U.S. Treasuries close
to record lows, encouraging even more foreign investors to seek
higher-yielding bonds in countries such as Brazil.

After hiking the IOF tax on bonds only two weeks earlier,
Brazil’s government raised its tax on foreign bond purchases to
6 percent from 4 percent. The first attempt did little to curb
the currency’s rally, and on Oct. 5 the real hit a two-year
high just after the tax was raised to 4 percent.

The government also announced Monday it will increase the
tax on the collateral that foreign investors have to put up
when they want to trade Brazilian derivatives — to 6 percent
from 0.38 percent.

But analysts doubted the effectiveness of the moves. The
tax on bond purchases would need to be much higher to push
investors away from Brazil’s high yields and attractive
economy, they said. Also, the government needs a constant
stream of so-called “hot money” to plug it’s growing current
account deficit.

The reaction in the bond and interest rate futures market
was limited. The yield on the 10-year fixed-rate,
real-denominated note, known as NTN-F (BR10YT=RR: ), rose
slightly as investors moved out of the market.

The yield on the contract due January 2012 (DIJF2: ), one of
the most heavily traded contracts early in the session, rose to
11.30 percent from 11.28 percent.
(Editing by Todd Benson and Jeffrey Benkoe)

EMERGING MARKETS-Brazil real sinks on tax hikes, China move