Reports have indicated that the Brazilian government may re-introduce tax for foreign investors who invest in bonds. The Brazilian government is seeking to prevent the country’s currency from appreciating too far against the US dollar. The reports were carried by Brazil’s O Estado de Sao Paulo newspaper on Saturday. However, the paper said the government would hold its waters till the discussions at the Group of 20 heads of state in South Korea this week.

Former Brazilian President Luiz Inacio Lula da Silva and incumbent president Dilma Rousseff have indicated that they will be raising concerns over nations that intentionally undervalue their currencies to make exports more attractive. The government will wait until after this coming week's discussions at the Group of 20 heads of state meeting in South Korea, at which President Luiz Inacio Lula da Silva and President-elect Dilma Rousseff have said they'll be pressing their concerns about countries deliberately undervaluing their currencies to make exports more attractive.

The Brazilian president has complained that the U.S. and China are engaged in a “currency war" as they seek to protect their economies from the consequences of the global financial and economic crisis. O Estado de Sao Paulo reported the income tax be applied to profits raised by foreign investors that invest in government securities. Many investors have been lured to Brazil by the high interest paid on government debt, as the central bank's key Selic rate stands at a towering 10.75%. In much of the developed world, including the U.S., interest rates are close to zero.

The government may also step up some of its more traditional mechanisms, such as its purchases of dollars in the spot market, either via the Central Bank or the Treasury, or increase the IOF tax on investments in equities from the current 2%, according to the report. The government has already raised the IOF tax on bond and certain other investments to 6%.

Other than that, the Brazilian central bank is as expected to commence provision of reverse swap auctions, which allow investors to exchange dollar-indexed bonds for paper linked to domestic interest rates, easing some of the pressure in the dollar futures market. Reverse swap auctions were last used by the central bank in 2006 and 2007 to help support the U.S. dollar against the Brazilian real at a time when the real was appreciating rapidly against the U.S. currency. A strong real hurts the country's balance of payments by weakening Brazilian exports.

7 Nov 2010.