EMERGING MARKETS-Brazil’s real sinks on tax rise, China move

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

* Brazil’s real down 1.1 pct, Mexican peso loses 0.7 pct

* Analysts doubt long-term success of Brazil FX measures

* Chile’s peso sinks 1.3 pct as copper prices fall
(Updates prices to afternoon)

By Samantha Pearson

SAO PAULO, Oct 19 (BestGrowthStock) – The Brazilian real dropped
sharply on Tuesday after an interest rate hike 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.

After paring some early losses, the real (BRBY: ) was trading
1.07 percent weaker at 1.682 reais per U.S. dollar on the local
spot market and heading for its biggest one-day loss in about a
month.

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 on 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:nN18280200]

“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 currencies on Tuesday.

The Mexican peso (MXN=: ) dropped 0.65 percent to 12.4890 per
dollar on Tuesday, pushed down by global dollar strength, while
the government hinted at measures aimed at helping control the
rampaging currency.

Chile’s peso (CLP=: ) weakened more than 1 percent to 487 per
dollar, pushed down by global dollar strength. The government
hinted at measures aimed at helping control a peso rally.
[ID:nN19122042]

CALL FOR HELP

Brazil’s finance minister, Guido Mantega, later Tuesday
praised China’s decision to raise interest rates, saying the
hike was “in the right direction.” [ID:nN19130365]

In the lead-up to this week’s G20 finance ministers meeting
in South Korea, Mantega has urged countries such as the United
States to help ease the problems of emerging economies, 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.

A strong currency makes exports more expensive and can
cause long-term damage to a country’s economy.

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 government also announced on 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.

“Fundamentals are solid for Brazil and we will be ready to
resume recommending buying the real as soon as the dust
settles,” analysts at BNP Paribas said in a note to clients
Tuesday.

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
11.32 percent from 11.28 percent.
(Additional reporting by Caroline Stauffer in Mexico City,
editing by Todd Benson and Jeffrey Benkoe)

EMERGING MARKETS-Brazil’s real sinks on tax rise, China move