Brazilian Real Strengthens for Third Consecutive Session as Treasury Yields Surge Past 5%

The USD/BRL exchange rate stands at 5.6455 this morning (May 22, 2025), showing a slight decrease of 0.01% from yesterday’s close of 5.6530.

This marks the third consecutive session of gains for the Brazilian currency, continuing its strengthening trend against the dollar. On Wednesday (May 21), the USD/BRL closed at 5.6530, with the Brazilian real strengthening by 0.25% against the dollar.

This followed Tuesday’s close at 5.6673, demonstrating consistent appreciation of the real this week. The currency pair has been moving steadily lower since mid-April, with the real gaining ground despite ongoing domestic fiscal concerns.

Overnight Developments

The Brazilian real continued to strengthen overnight amid growing caution about the fiscal scenario in the United States. Treasury yields climbed further, with the 30-year Treasury yield exceeding the psychological 5% mark for the second consecutive session.

Despite this significant rise in Treasury yields, the dollar weakened globally, with the DXY index falling below 100 points.

Fundamental Drivers

Several key factors are influencing the real’s current trading pattern:

High Interest Rate Differential: Brazil’s benchmark Selic rate stands at 14.75%, its highest level since 2006, creating significant carry trade opportunities for investors.

As Bruno Shahini, investment specialist at Nomad, noted: “Despite the significant rise in Treasury yields, with the 30-year rate rising more than 10 basis points, we’re seeing a surprising global decline in the dollar.

In this context, the real shows slight appreciation due to the high Selic rate, global dollar weakness, and foreign investment flows directed to both stocks and fixed income this month.”

U.S. Fiscal Concerns: Markets remain focused on the deteriorating fiscal outlook in the United States. President Trump has been negotiating with House Speaker Mike Johnson, House Majority Leader Steve Scalise, and Republican Tom Emmer regarding a bill that proposes tax cuts and increased spending in strategic areas.

Analysts estimate that Trump’s proposal, if approved, could raise U.S. public debt to approximately $37 trillion, equivalent to a fiscal deficit of 7.8% of GDP, up from 6.3% in 2024.

Moody’s Downgrade Impact: Last Friday’s (May 16) downgrade of U.S. sovereign debt by Moody’s from ‘Aaa’ to ‘Aa1’ continues to weigh on the dollar globally, providing support for the Brazilian real. This has driven Treasury yields higher and spurred a global search for higher returns.

Brazil’s External Position: Brazil’s strong trade performance has bolstered the real, with a March trade surplus of $8.2 billion exceeding forecasts and underscoring exporters’ ability to navigate shifting tariff regimes.

Market Commentary

Financial institutions have been revising their outlook on the Brazilian real in recent weeks. Santander recently adjusted its year-end dollar estimate to R$5.80 from R$5.90, attributing approximately 60% of the real’s appreciation this year to domestic factors, “notably the attractive interest rate differential”.

Bank of America has taken an even more bullish stance, lowering its year-end dollar estimate from R$5.75 to R$5.50. BofA analysts believe the real is “about 20% undervalued in real terms, weighted by its long-term average and the largest valuation gap among major Latin American currencies”.

However, some institutions remain cautious. Dutch bank ING, while reducing its year-end dollar estimate to R$6.00 from R$6.25, maintains a conservative outlook due to “fiscal risks ahead of the 2026 elections”.

Technical Analysis

The USD/BRL pair is currently trading well below its 200-day moving average, positioned around 5.72. The currency pair has established a clear downtrend since mid-April, breaking below key support levels.

Recent price action shows the pair testing support near 5.64, with the next significant support level visible around 5.60. The RSI indicator currently sits at 42, suggesting room for further real appreciation without entering oversold territory.

Bollinger Bands indicate decreased volatility compared to previous weeks, with prices hugging the lower band, suggesting sustained downward pressure on the pair.

Domestic Factors

In Brazil, President Luiz Inácio Lula da Silva signed a provisional measure regarding the electricity sector that establishes “tariff justice,” expanding free electricity for millions of families.

This measure is part of the government’s announcement package aimed at improving Lula’s popularity ahead of the 2026 presidential elections.

Market Outlook

Trading Economics forecasts the USD/BRL to trade at 5.73 by the end of this quarter and at 5.92 in 12 months. The Brazilian real has appreciated by about 7.8% against the dollar from an intraday low of R$6.4/$1 on December 25, 2024.

Looking ahead, analysts suggest that the continuation of this appreciating trend will “depend on the continuity of fiscal reforms in Brazil and global economic conditions”.

For now, the high Selic rate, global dollar weakness, and foreign investment flows continue to support the Brazilian currency despite ongoing fiscal concerns both domestically and in the United States.

LatAm Markets: Live Signals → — real-time movers, turnover leaders and FX across Latin America.