Brazil’s real fell after the central bank stepped up efforts to stem the currency’s appreciation and investors fled higher-yielding assets on concern the European debt crisis will spread to Italy. The real weakened 1 percent to 1.5775 per dollar after the central bank announced measures late on July 8 to discourage bets against the dollar in Brazil. Brazilian policy makers said they will require banks to make non-interest bearing deposits with the central bank equivalent to 60 percent of short dollar positions that exceed $1 billion or their capital base, whichever is smaller. The currency also weakened on growing debt concerns in Europe as Italian bond yields rose and the euro fell to a six-week low against the dollar, said Win Thin, global head of emerging- markets currency strategy at Brown Brothers Harriman & Co. “With these kind of interventionist measures, it’s always good to go with the market,” Thin said in a telephone interview from New York. “The Italy thing is flaring up and that’s just hitting emerging-markets.” Yields on Italy’s benchmark 10-year bonds closed above 5 percent for the first time since November 2008 on July 6 and were at 5.68 percent, a nine-year high. The 17-nation euro depreciated 1.6 percent to $1.4046. Spot Market Brazil is seeking to improve the working of the currency spot market and reduce bets the real will strengthen that reached $14.7 billion in June, the central bank said. June’s long real positions were up from $9.3 billion in May and the highest since December. The rule, which banks will have five working days to implement, amends a regulation introduced in January that required banks to pay deposits on short positions above $3 billion. A short position is a bet that the price will fall. Banks in Brazil may have to unwind as much as $5 billion of short U.S. dollar positions by selling forward contracts on the dollar to comply with the new requirements, according to Kenneth Lam, a Latin America strategist with Citigroup Inc. in New York. The yield investors receive on real-denominated assets plunged 273 basis points, or 2.73 percentage point, to 6.98 percent, the lowest since May 25, one-month non-deliverable forward contracts show. The real has gained 47 percent against the dollar since the end of 2008, the most among 25 emerging market currencies tracked by Bloomberg. Benchmark Rate Policy makers raised interest rates at their last four meetings, to 12.25 percent, and traders are betting they will raise rates twice more this year, according to Bloomberg estimates based on interest rate futures. “While the need to adjust positions coincides with a new bout of Europe-related risk aversion,” the new measures alone should not “change the appreciation trend,” Tony Volpon, a Latin America strategist at Nomura Holdings Inc. in New York, wrote in a note to clients today. “With such a substantial interest-rate differential, the incentives to maintain long BRL positions are just too large.” In October, Mantega tripled to 6 percent a tax on foreign investors’ fixed-income purchases. On March 29, President Dilma Rousseff’s administration increased to 6 percent a tax on new corporate loans and debt sales abroad by banks. A few days later, she applied the higher tax to renewed, renegotiated, or transferred loans of as long as two years in length. Companies previously paid a 5.38 percent tax on loans of up to 90 days and zero tax when the operation exceeded three months. “The currency war continues because the recovery in advanced countries has led to expansionary monetary policies,” Mantega told reporters in Paris on July 7. Yields on the Brazilian interest-rate futures contract due in January 2013 fell were unchanged at 12.71 percent. To contact the reporters on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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