SAO PAULO, Brazil (AP) -- Uncertainty over how Brazil's new finance minister will oversee Latin America's largest economy sent its currency and stocks tumbling, despite assurances he will maintain the policies of his predecessor who resigned amid an embarrassing scandal.
Brazil's real plunged 1.8 percent against the U.S. dollar Tuesday and stocks on Sao Paulo's benchmark Bovespa index fell 2.5 percent, a day after Finance Minister Antonio Palocci left his post and was replaced by Guido Mantega, president of Brazil's National Development Bank.
Repeated pledges by Mantega to maintain the orthodox monetary policies of President Luiz Inacio Lula da Silva's government did little to reassure investors, who for the first time in years worried the government may waver in its commitment to taming inflation and nurturing slow and sustainable growth.
Their biggest concerns are that Mantega may reduce sky-high interest rates too quickly to keep inflation, currently at 5.5 percent, in check, and may increase government spending to boost economic growth as Silva prepares for his anticipated re-election bid.
Mantega sought to calm the markets, promising to continue the government's efforts to cap spending and battle inflation.
However, Brazil's new finance minister has previously criticized the high interest-rate policy of Brazil's Central Bank, leading investors to flee for safety amid fears that Mantega may sacrifice fiscal and monetary control in a quest for more rapid economic growth and the jobs for tens of millions of Brazilians immersed in poverty.
"The market was, and still is, waiting for proof that he won't change policy," said Miriam Tavares of the AGK brokerage in Sao Paulo.
Brazil's presidential election is in October, and analysts say opposition leaders may use the new scandal to try to hurt Silva and his Workers Party. That could force him to court his leftist base with populist economic policies loathed by financial players and Wall Street.
"This year's presidential election has become market-moving, " said Christopher Garman, a Latin America analyst with the Eurasia Group.
The real closed below the psychologically important level of 2.2-to-the-dollar, and is now 5 percent below its five-year high of 2.11 set on March 16, just before the scandal involving Palocci started escalating.
Stocks fell across sectors on the Bovespa index, which fell to 36,682 from 37,641 Monday, leaving the index down 6.5 percent from its all-time high of 39,239 set on March 3.
Helping to drive the declines were comments from the U.S. Federal Reserve interpreted as indications that U.S. interest rates may rise, which could lead investors to take money out of emerging markets like Brazil and park it in the United States.
Foreign investors had poured money into Brazilian equities and debt in recent years, attracted by Brazil's relative economic stability as well as higher interest rates and returns than they could get in the United States.
The new volatility could continue until investors see how Mantega operates because "his views about the long term seem rather nebulous," said Adauto Lima, chief economist at the Brazilian unit of West LB bank.
In a note to clients, JP Morgan Chase & Co. said Brazil seems stable for now, but added that "the economic performance of an eventual second Lula administration is now more uncertain."
Palocci faces accusations of frequenting a house in Brasilia where lobbyists held parties with prostitutes and money arrived by the suitcase, possibly for political payoffs. He denies the accusations and ever setting foot in the house.
The scandal turned into a political time bomb last week after bank records from the witness who placed Palocci at the house were leaked from the state-owned Caixa Economica Federal bank.
The bank's president, Jorge Mattoso, told police he personally handed the records to Palocci, whose ministry oversees the bank. Mattoso was charged with violating bank secrecy laws, and Justice Minister Thomaz Bastos said Palocci would be investigated as part of the police probe.
At a ceremony in Brasilia to hand power over to Mantega, Palocci did not directly address the allegations but suggested he was the victim of political persecution.
During Palocci's tenure, Brazil's economy saw increased jobs and a reduction in the double-digit inflation.
