Dollar Closes Over R$5 for First Time in History

RIO DE JANEIRO, BRAZIL – On Monday, March 16th, the dollar closed up 4.59 percent at R$5.05, a new nominal record (excluding inflation). The tourism dollar was quoted at R$5.1880 on sale. In some foreign exchange offices, it sold above R$5.28.

In real terms (corrected for inflation), the US currency is still far from its 2002 peak. If one considers only the IPCA (Broad National Consumer Price Index), as measured by the IBGE, the peak of R$4 that year is equivalent to some R$10.80 today. If American inflation is also taken into account, the corrected value would be around R$7.50.

The currency’s upswing is impacted by market risk aversion with the advance of the coronavirus and its effects on the global economy and by the expected cut in interest rates in Brazil. In 2020, each dollar became over R$1 more expensive.

The dollar is considered one of the safest investments in the world, alongside gold and US Treasury bonds. In times of strong risk aversion, investors tend to buy dollars or funds tied to the currency as a form of protection.

The market expects the Brazilian Central Bank (BC) to cut interest rates this week by at least 0.5 percentage points, which would bring the SELIC to an all-time low of 3.75 percent a year.

The basic interest rate in this range contributes to the high dollar through the carry trade, an investment practice in which the profit lies in the difference between the exchange rate and interest rates. In it, the investor borrows money at a lower interest rate in one country, in this case, the USA, to apply it in another, with another currency, where the interest rate is higher, namely Brazil.

With the SELIC at its current level of 4.25 percent, this operation is no longer profitable and foreigners withdraw their resources, in dollars, from the country, which increases the rate.

On Monday, the Brazilian Stock Market saw its fifth circuit breaker of the month. Trading was interrupted for 30 minutes immediately at the opening of the trading session when the market dropped over 12 percent. At the close, the IBOVESPA dropped 13.92 percent to 71,168 points, the lowest level since June 2018, before the electoral race that led Jair Bolsonaro to the presidency.

Monday’s financial market turbulence is the result of the second extraordinary interest rate cut by the Federal Reserve, the American central bank, this month. On Sunday, March 15th, the bank anticipated its meeting scheduled for Wednesday and cut the basic interest rate by one full percentage point, a monetary incentive similar to that used in 2008, the year of the financial crisis. Now, interest rates in the country are between zero and 0.25 percent per year.

Investors perceive the move as a means to protect banks and companies from the risk of being unable to honor debts due to the halt in economic activity. With interest rates close to zero and an injection of US$700 billion in liquidity, companies have a greater margin to get around debts.

In a new statement, US President Donald Trump said that the worst stage of the coronavirus should be between July and August or later. The president asked people to avoid crowds for two weeks.

With the worsening outlook, US Stock Markets had their third worst day in history. The New York Stock Exchange also triggered the circuit breaker earlier in the day, when the S&P 500 index fell eight percent. At the end of the trading session, the index fell 11.98 percent.

The Dow Jones retreated 12.93 percent and was at its lowest level in two years. The Nasdaq dropped 12.32 percent. In Europe, the markets returned to 2012 levels. The Stoxx 50 index, which includes the largest companies in the region, dropped 5.25 percent.

Source: Folha