SAO PAULO
Brazil's real weakened to a 10-year low against a strong U.S. dollar on Wednesday, weighed down by fears of a potential political crisis in the country.
Shortly before 1 p.m. in Sao Paulo (GMT1600), the dollar breached the three-real psychological barrier, buying 3.001 reais -- later falling back to 2.975 reais by 2:30 p.m. in the city, 1.55 percent higher than Tuesday's close-of-business rate of 2.937 to the dollar.
It is the weakest performance by the real since Aug. 16, 2004, when the dollar bought 3.015 reais.
Local media reports suggested the markets were expressing political uncertainty after the government's "provisional act," which would have increased state revenues by removing certain tax exemptions, was derailed by the President of the National Congress Renan Calheiros, late Tuesday. The government will now attempt the tax changes through a bill.
The government's economic team, led by Finance Minister Joaquim Levy, has introduced a number of fiscal adjustments it believes are vital to rebalance the country's books and bring the economy back to growth, among them several tax hikes or tax break cuts.
The markets fear Brazil could be downgraded by credit rating agencies if it does not show significant progress in tackling its currency misfortunes.
President Dilma Rousseff has also attempted to rein in rebellious backbenchers in the ruling coalition, particularly from the vast kingmaker PMDB party, of which both congressional presidents are members.
Adding more fuel to the fire, Prosecutor General Rodrigo Janot delivered a long-awaited list of individuals on Tuesday, reported to include several senior politicians, to the Supreme Court that Janot deemed necessary of being investigated for corruption.
Operation Lava Jato, or Car Wash, as the investigation has been dubbed, is investigating a vast kickback scheme and cartel which allegedly operated at the country's biggest company, the state-controlled oil giant Petrobras. Janot has requested 28 investigations into 54 individuals from witness testimony gathered since the first arrests nearly a year ago.
The Supreme Court is expected on Friday to release the names of those individuals against whom there are sufficient grounds, in its opinion, for formal investigation. Under Brazilian law only the Supreme Court can judge politicians.
Financial newspaper Valor Economico said domestic investors "(sensed) the political tension in Brasilia in their veins," which was reflected in less confident markets.
Recent forecasts by economists in Brazil, which have consistently predicted negative growth in 2015 and inflation topping 7 percent, have further dampened the appetite for Brazilian stock and shares.
The Ibovespa was down 1.43 percent at 2:30 p.m., having fallen to a two-week low.
