Brazilian real sinks to historic low against US dollar

By Ben Tavener

SAO PAULO

The Brazilian real sunk to a historic low against the U.S. dollar Tuesday, breaking through the 4-real psychological barrier amid market concerns over the political response to Brazil's ongoing economic crisis.

The real closed at 4.05, up 1.8 percent on Monday's close of 3.98 reals -- smashing the previous day-end record of 3.99 set in 2002.

Uncertainty about the global economy, China's economic performance, and U.S. Federal Bank interest rate policy have also weighed heavy on the currency, which has now lost 52.5 percent of its value against the dollar in the past year.

A second record, relating to the historic intraday rate, was also broken Tuesday. Previously set at 4.01, the dollar reached a new intraday maximum of 4.06 at 2:30 p.m. in Sao Paulo (GMT 17:30).

The two previous records were set o Oct. 10, 2002, also amid political fears in the run-up to presidential elections to replace Fernando Henrique Cardoso, eventually won by Luiz Inácio Lula da Silva.

Other emerging economies in Latin America, including Mexico and Chile, have also seen their currencies depreciate significantly against the dollar in recent times.

The Brazilian real is now at its weakest against the dollar since it was created in 1994 as part of economic reforms known as the "Plano Real" or "real plan." The real's depreciation has been stoked by political uncertainty, as incumbent president Dilma Rousseff continues to face considerable resistance from Congress regarding fiscal reform plans.

Congress is set to vote on overturning 32 presidential vetoes. If successfully challenged, it would constitute a major defeat for the government and the resulting 127.8 billion reais ($31.5 billion) of additional spending during the next four years would virtually cancel out spending cuts that the Planalto has proposed and argues are vital to stabilize the economy, which recently entered a deep recession.

However, contradicting previous reports that Congress had been urged to delay proceedings, local media said later Tuesday that the president had now urged voting to continue to calm the markets.

Rousseff's economic team has been scrambling to find spending cuts and extra revenue to bridge a 30.5 billion-real shortfall in next year's federal budget. The unprecedented budget deficit led to a downgrade by Standard & Poor's, which stripped Brazil of one of its coveted hard-won investment-grade ratings.

The government later announced spending cuts and tax increases totaling 65 billion reais, including a bill to revive an unpopular levy on financial transactions abolished in 2007, which Rousseff sent to Congress on Tuesday. But both opposition lawmakers and anti-austerity members of Rousseff's ruling coalition have signaled they will fight aspects of Rousseff's fiscal adjustments.

Political uncertainty is also being stoked by market fears that the president could be impeached for fiscal maneuvers relating to the government's 2014 accounts – currently being investigated by the country's main audit court – and allegations that funds for Rousseff's 2014 re-election campaign originated from a multi-billion-dollar graft scheme involving corruptly-inflated contracts signed between state-run oil giant Petrobras and Brazil's top construction and engineering firms.