Brazil was the first country to say openly that the world is facing a currency war. And its government is being increasingly active in opening battles in the defence of its rising real. The IOF tax on portfolio inflows into fixed-income instruments now stands at 6%, up from 2% one month ago. The government has also levied a similar tax on margin deposits on derivative contracts from non-residents. Perhaps more important, it then moved to close off easy loopholes to avoid the IOF – what it described as "regulatory arbitrage". For example, foreign investors used to be able to avoid the IOF by buying and then selling equities, then using the real-denominated proceeds to buy fixed-income products that were not subject to the IOF. Now investments using proceeds from equity sales are subject to the full tax at the moment of conversion.
That these loopholes have now been closed signals the Brazilian government’s serious intent to address the rising valuation of the real against the dollar, rather than offer symbolic expressions of frustration. President Lula also recently stated that Brazil’s international reserves would reach $300 billion by December 2010, the end of his presidency. The stock of central bank reserves was $281 billion on October 15, which suggests that the central bank expects to be battling the rising real by deploying an active strategy until the end of the year.