Aug. 19 (Bloomberg) -- Brazil real rose for a fifth day after the country's high court ruled the government's tax on pensions is constitutional, boosting optimism the government can narrow its budget deficit and attract investment.

``The decision showed the government is on the right track - - that makes investors optimistic,'' said Ricardo Junqueira, currency strategist for Atica Gestao de Recursos in Rio de Janeiro, which has 38 million reais ($12.8 million) under management. ``Every time we see progress in microeconomic agenda, Brazil's risk falls and that boosts inflows.''

The ruling opens the way for the government to cut its $25 billion budget deficit and reduce its $430 billion debt, the largest among developing nations, said Junqueira. Social Security Minister Amir Lando said in June that the tax would raise about $600 million a year.

The real rose 0.3 percent to 2.9710 per dollar at 9:15 a.m. New York after climbing 0.7 percent to a three-month high of 2.9800 per dollar yesterday. The currency has gained 3.7 percent against the dollar since June 30, the second-best performance of the 16 most-traded currencies after New Zealand's dollar.

The 11-member court sided with the government in a 7-4 vote, ruling the 11 percent tax on pensions of retired government workers does not infringe on their rights under the country's 1988 constitution.

Priorities

The court raised the level set by Congress for taxing public employee pensions to the same amount taxable for private retirement income, a decision that will cost the government about $175 million next year.

``It should allow most people to continue focusing on Brazil's fundamentals,'' said Jean-Dominique Butikofer, who manages about $450 million in emerging market debt for Julius Baer Asset Management in Zurich, said in a phone interview before the ruling was concluded. He has bought more Brazilian bonds since late April.

Nelson Jobim, the Supreme Court's president, said Monday in Brasilia at a meeting with visiting American judges that any rulings must take into account Brazil's current economic and social reality and ``avoid demagogy.''

Lula said last year that the pension reform bill, which Congress passed last December, was the cornerstone of his deficit- reduction policies and that its passage would make Brazil more attractive and safer for investors.

Courts had to review the bill to decide whether its content was consistent with country's 1988 political constitution.

Rates Unchanged

The central bank's decision yesterday to leave the overnight rate unchanged at 16 percent for a fourth month may boost the currency, said economists such as Zeina Latif of HSBC Investment Bank.

The decision demonstrates that the bank's priority is to contain inflation, suggesting that foreign and local investors can expect stable, high returns to their fixed-income and stock investments, said Latif.

Speculation Brazil may sell bonds abroad to take advantage of growing investor appetite for the country's securities will likely add to gains in the currency and bonds, said investors such as John L. Peta of Standish Mellon Asset Management.

The U.S. dollar contract for Sept. 1 settlement, the most traded on Sao Paulo's BM&F commodities and futures exchange, fell 0.38 percent to 2.9845 reais to the dollar.

Interest rate futures fell for the third day in four, with the contract on one-day bank deposits for January delivery, the most-traded the BM&F Exchange, falling to 16.460 percent from 16.568 percent yesterday. The contract indicates investor expectations for the year-end.

Brazil's benchmark bond maturing in 2040 fell for the first day in six, losing 0.05 cent on the dollar to 104.05, boosting its yield to 10.37 percent, according to JPMorgan Chase & Co.

To contact the reporters on this story: Guillermo Parra-Bernal in Brasilia at gparra@bloomberg.net; Romina Nicaretta in Sao Paulo at Rnicaretta@bloomberg.net

Last Updated: August 19, 2004 09:18 EDT