Brazil's currency and stocks fell sharply yesterday after the government imposed a 2 per cent tax on foreign portfolio investments to stem the rapid rise of its exchange rate.

The move, announced shortly before local markets closed on Monday, followed steady gains in Brazil's currency, the real, which has advanced 36 per cent against the US dollar this year, reducing the competitiveness of Brazilian exports. Foreign direct investment is unaffected by the tax.

The imposition of taxes on international financial flows has symbolic significance for emerging market investors. Malaysia, blaming foreign speculation for destabilising its economy, imposed capital controls to prevent a run on its currency in 1998 during the Asian financial crisis. Chile, one of the most successful economies in Latin America, maintained controls on capital inflows for many years but has now suspended them.