Brazil: Dollar hits 20-Year high and threatens hope for drop against the real

RIO DE JANEIRO, BRAZIL – The Dollar Index (DXY), a reference for the variation of US American currency prices worldwide, reached the maximum since 2002 on May 12, when it hit 104.54 points.

The index is formed by a basket of strong currencies, representing most of the dollar trades globally. This year alone, the DXY has risen more than in 2021. The accumulated appreciation in these first months of 2022 was 8.8% against 6.7% last year.

The acceleration of the upward movement coincides with the beginning of monetary tightening by the Federal Reserve, the American central bank.

IS THE DOLLAR MORE EXPENSIVE THAN THE EURO?

Higher interest rates translate into more profitable bonds, which oblige investors to exchange their currencies for dollars to buy them. The euro, which accounts for 57.6% of the DXY, is among the currencies that have suffered most from rising interest rates in the United States.

That is because the interest rate differential between the European and American economies has been growing, as the European Central Bank has been more cautious about monetary tightening, given the potential effects on economic activity — already shaken by the war in Ukraine.

Since the beginning of the year, the euro has depreciated 8.19% and is now trading near US$1.04. In other words, if it falls another 5%, it will be possible to buy more euros than dollars with the same amount of money.

WEAKER REAL

But the situation has not been favorable for the real either. The Brazilian currency, which appreciated strongly at the beginning of the year, lost strength as commodity prices cooled and expectations grew of a tougher monetary tightening in the United States. Not even the Selic at 12.75% – and with new hikes already priced in – has held the dollars in the country.

The dollar still accumulates a 7% drop against the real in the year. However, the scenario is already very different from mid-April, when the accumulated drop in the year reached 17%. The appreciation of the dollar worldwide is pointed out by economists as one of the factors for the appreciation of the currency in Brazil.

Although the balance of the Brazilian currency remains positive, the market consensus is that the best moment of the real is now behind us. The exit of foreigners from the stock exchange as of April and the search for defensive assets amid fears of a recession caused by high interest rates are signs that reinforce the stronger dollar in the country.

According to the Focus bulletin, the consensus of economists is for a dollar at R$5 by the end of the year and — at least — until 2025.

With information from Exame