By Anthony Boadle and Lisandra Paraguassu
BRASILIA (Reuters) - Brazil's president and senior lawmakers were unwavering in their support for a major pension reform on Wednesday despite nationwide protests against the proposal and the dramatic expansion of a graft probe threatening the ruling coalition.
Moody's Investors Service added a vote of confidence in the government, citing the ongoing progress of fiscal reforms as a reason for revising its outlook for Brazil's sovereign credit rating to "stable" from "negative."
Brazil's currency and benchmark stock index both rose around 2.0 percent on Wednesday, leading a rally in Latin American assets after the U.S. Federal Reserve signaled a gradual pace for interest rate rises.
Wednesday's developments underscored that the political momentum is still in President Michel Temer's favor as he pushes ahead with an unpopular austerity agenda that has drawn opposition into the streets but retained the support of congressional leaders.
The public backing from legislative allies was particularly important after Brazil's top public prosecutor moved on Tuesday to target dozens of senior politicians as part of a corruption probe centered on kickbacks at state oil company Petrobras.
Despite the snowballing investigation and well-organized union resistance, Thomaz Favaro, a political analyst with global consultancy Control Risks, said Temer has built a more robust coalition than his predecessor, Dilma Rousseff, who was impeached last year as the Petrobras scandal gained steam.
"The coalition behind Temer has proven to be more stable than Dilma's and will continue to be so despite corruption investigations, due to the degree of ideological affinity that unites it on business initiatives and concern for Brazil's fiscal position," he said.
Brazil's prosecutor general reportedly named five members of Temer's cabinet and his most senior congressional allies in motions before the Supreme Court, but those same senior lawmakers said on Wednesday they were pressing on with reforms.
Asked if the scandal would interfere with the legislative calendar, Senate President Eunicio Oliveira and House Speaker Rodrigo Maia said nothing had changed. Both said investigations would give a chance to clarify allegations in the press.
Their steadfast support contrasted with rowdy demonstrations that occupied the finance ministry in the capital Brasilia and snarled traffic in the business hub of Sao Paulo to protest Temer's proposed reforms.
The impact of a strike by public transportation workers was lighter than anticipated in Rio de Janeiro and other smaller cities.
Still, an afternoon march drew tens of thousands to a midtown thoroughfare in Sao Paulo, highlighting well organized union resistance to limiting pension benefits and raising the retirement age as the government has proposed.
A smaller demonstration in Rio was marked by clashes between masked protestors and police, who used tear gas to control the crowd.
Temer told small business owners in Brasilia on Wednesday that pension reform was essential to lifting the economy from its worst slump on record and closing a huge fiscal deficit before it triggered an even deeper crisis.
"We can't do something too modest now or in four or five years we'll have to follow the example of Portugal, Spain, Greece and other countries that had to make a much bigger cut because they didn't take preventative measures," he said.
Moody's said it expected Temer's pension reform to pass Congress in the second half of 2017.
(Reporting by Anthony Boadle and Lisandra Paraguassu; Additional reporting by Maria Carolina Mello and Marcela Ayres in Brasilia, Pedro Fonseca and Rodrigo Viga Gaier in Rio de Janeiro, writing by Brad Haynes; editing by Daniel Flynn)