Brazil currency surges almost 1 pct, stocks seesaw

SAO PAULO, May 12 (Reuters) - Brazil's currency rallied nearly 1 percent on Monday as concerns eased that the government might slap restrictions on foreign capital to curb the real's strength, while stocks seesawed near the break-even mark after a recent run-up.

The real BRBY strengthened 0.89 percent to 1.671 per U.S. dollar, gaining for the second straight session on expectations of increased dollar inflows following the recent decision by Standard & Poor's to grant Brazil a long-sought investment grade credit rating.

With the real already trading near its strongest level in nine years, the market has been rife with speculation that the government might raise the so-called IOF financial transactions tax on foreign investment to curb the currency's gains.

But those concerns have eased in recent days as government officials have distanced themselves from the proposal, helping to prop up the real.

"It looks like any kind of extra tax has been ruled out, and that's what was worrying the market," said Marcelo Voss, chief economist at Liquidez brokerage in Sao Paulo.

Investors were also encouraged by media reports over the weekend that Brazil's government is considering raising its primary budget surplus target to 5 percent of gross domestic product from 3.8 percent.

The change could help ease inflationary pressures, limit future interest rate increases and raise money for a sovereign wealth fund that the government is preparing to launch, Folha de S.Paulo newspaper reported on Saturday.

Interest-rate futures <O#DIJ:> on the BM&F commodities and futures exchange in Sao Paulo fell across the board, reflecting the improved market sentiment.

At the Sao Paulo stock exchange, the benchmark Bovespa index .BVSP hovered around the break-even mark for the second session in a row after surging to a record last week. The index was down 0.08 percent at 69,590 points, weighed down by slumping airline shares.