June 4, 2014 / 5:45 PM / 4 years ago

EMERGING MARKETS-Brazil currency sinks despite tax change, intervention eyed

SAO PAULO, June 4 (Reuters) - Brazil's real weakened to its
lowest level in over two months on Wednesday, despite the
removal of a tax that should encourage dollar inflows, as
investors remained cautious over the outlook for future central
bank interventions in the currency market.
    Other Latin American currencies were weaker or little
changed against the dollar, which rose globally on the back of
higher Treasury rates and a stronger U.S. ISM services sector
    The real  lost ground for a fourth straight
session, falling to 2.28 per dollar, also on the back of the
U.S. data.
    "The ISM services data came in better than expected and
caused ... the real and other emerging currencies to weaken,"
said Luciano Rostagno, chief strategist at Banco Mizuho in Sao
    Earlier on Wednesday, Brazil's government announced the
scrapping of a 6 percent financial tax, known as the IOF, on
some short-term foreign loans, a move that Finance Minister
Guido Mantega said would help normalize the currency market.
    The real has been volatile in recent sessions after the
central bank tried to slow down the pace at which it rolls over
expiring currency swaps, used by investors who wish to hedge
themselves against a possible weakening of the currency.
    For a second straight day on Wednesday, the bank rolled over
10,000 currency swaps - derivatives that let investors hedge
against currency losses - after a sharp drop in the currency on
Monday following its decision to roll over only half that
    "The dollar is rising abroad and there are some doubts about
interventions," said a trader who declined to be named because
he is not authorized to speak to the press. "Maybe with this IOF
measure, if there are more inflows from here on, the central
bank could reduce its interventions. When you have uncertainty
ahead, people prefer to stay cautious."
    Forecasts for the real point to a gradual weakening of the
Brazilian currency to 2.47 per dollar in 12 months, according to
Reuters' monthly survey of 31 strategists. 
    Elsewhere in Latin America, Chile's peso declined by
the most in two weeks, driven by a drop of over 1 percent in the
price of copper, the country's main export.
    Stock markets tracked downward across the region, with the
MSCI Latin American stock index retracing the
previous two sessions' gains.
    Brazil's benchmark Bovespa stock index dipped
slightly, weighed down by data showing the country's industrial
sector shrank for a second straight month in April.
    Mexico's IPC index returned the previous session's
gains, driven by a 0.7 percent fall in telecommunications firm
America Movil.
    Key Latin American stock indexes and currencies at 1634 GMT:
 Stock indexes                 Latest        Daily   YTD pct
                                               pct    change
 MSCI Emerging Markets          1,031.09     -0.47      3.32
 MSCI LatAm                      3,234.4     -1.01      2.08
 Brazil Bovespa                51,801.75     -0.44      0.57
 Mexico IPC                    41,896.65     -0.54     -1.94
 Chile IPSA                     3,908.74     -0.14      5.66
 Chile IGPA                    19,086.32     -0.05      4.71
 Argentina MerVal               7,684.96      -0.3     42.55
 Colombia IGBC                 13,738.14     -0.39      5.10
 Peru IGRA                     15,817.07       0.4      0.40
 Venezuela IBC                   2,163.5         0    -20.94
 Currencies                                  Daily   YTD pct
                                               pct    change
                                  Latest    change  
 Brazil real                      2.2846     -0.30      3.16
 Mexico peso                     12.9438     -0.04      0.67
 Chile peso                        552.7     -0.51     -4.81
 Colombia peso                  1,898.49     -0.06      1.77
 Peru sol                          2.785      0.14      0.29
 Argentina peso (interbank)       8.1075     -0.15    -19.92
 Argentina peso (parallel)         11.58      0.43    -13.64
 (Reporting by Tiago Pariz and Asher Levine; editing by G
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