A temporary halt to the free-fall of the dollar

Yesterday's news about the imposition of a tax on financial transactions by the Brazilian government put a temporary stop to the seemingly never ending slide of the dollar, which has been more pronounced in Brazil and Uruguay than in other regions. The IOF tax is intended to slow down the influx of speculative foreign capital going into the Brazilian markets.

Following the announcement, on Tuesday the dollar rose 1.5% against the Uruguayan peso and 2.1% against the Brazilian real, considered dangerously overvalued by many of those who supposedly know about these things.

Funny because just a few days ago one of our Karens was expressing her interest in getting into the Brazilian market. Well, now if she does, she will be paying a 2% tax, which as the Brazilian paper Valor puts it, is equivalent to parking your money in fixed income for 84 days, but with no return, or bringing down the benchmark rate to 6.58%. If that sounds very high, bear in mind that rates in Brazil have always been much higher than in developed markets, and that there is a reason for that.

Now, onto our concern, the dollar versus the peso, well, after yesterday's reversal the dollar is down an accumulated 14.65% so far this year, still a scary thing. It sounded worse when it was 20%, but there's no guarantee that we will not see that again soon.

In Brazil, the market is in an uproar, calling the measures an attack by friendly fire on the stock exchange, and noting that the action will now move to New York American Depositary Receipts, thus bypassing the new tax and still funding Brazilian companies. Hence, they see no lasting effect on the strength of the real.

Even the government there is not confident that the tax will be enough to stop the appreciation of its currency, and is assessing further, desperate-sounding measures. In sum, for the time being, nobody expects the dollar rebound to last very long, neither in Brazil nor here.