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Thu, Jun 8, 2000
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Investors Remain Nervous After Brazil's Devaluation
Associated Press
RIO DE JANEIRO — Brazil's week-old decision to let its currency float against the dollar hasn't by any means calmed investor nerves about Latin America's largest economy.

The Brazilian real fell again in early trading today, slipping to 1.75 against the dollar from 1.70 at Thursday's close. The Central Bank began selling dollars to support the real, which strengthened some but soon headed down again.

The Sao Paulo stock exchange's Bovespa index rose by 1 percent in morning trading. On Thursday, jitters over the plunging real sent the Bovespa down by 4.6 percent after a euphoric 52-percent rise the four previous days.

Market analysts had expected a brighter scenario Thursday after good news from Brazil's Congress, where the lower house passed a key bill on Wednesday that aimed to reduce the government's budget deficit and instill new investor confidence.

But the weakening real has depreciated by about 31 percent since Jan. 12, apparently keeping investors skeptical about Brazil's ability to strengthen its shaky economy.

"If this isn't enough to attract inflows and kick-start exports, things will only get worse," a currency dealer in Rio de Janeiro said when the value of the real to the dollar plunged to 1.73 on Thursday. He spoke on condition of anonymity.

The real, which started Thursday at 1.59, made a slight comeback to close the day at 1.70. Some dealers believed the Central Bank intervened to prop up the currency, but it denied this.

A spokesman for President Fernando Henrique Cardoso said the government did not intend to dump its free-float policy.

"The president has decided what course the real will take, and we'll continue in the same way," said George Lamaziere in an interview with CBN radio station.

He attributed instability to markets' finding their "equilibrium" after the real's depreciation.

The government hopes its new currency policy will lure back foreign investors with a cheaper real. It follows a six-month period in which the Central Bank spent some $45 billion in foreign reserves in a failed effort to support the real.

Brazil's biggest worry remains an outflow of dollars. Despite the currency depreciation, some $1.7 billion has left the country since Friday. Markets estimate that reserves have dipped below $30 billion.

On Wednesday night, the Chamber of Deputies passed a bill reducing pensions for retired federal employees, which could save the government $2.5 billion a year.

Even more important than the savings, the vote sent a signal that Cardoso has the support needed to reduce the swollen budget deficit. The pension bill had failed four times earlier.

The government has promised to reduce its estimated $65 billion public deficit this year by about $16.4 billion. The pledge was a condition for approval of a $41.5 billion loan package assembled by the International Monetary Fund.

The Senate, which must approve the pension tax for the measure to take effect, decided Thursday to make the matter an urgent priority, meaning it could come to a vote as early as Tuesday.

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