Dollar depreciates in Brazil more than in other countries

RIO DE JANEIRO, BRAZIL – The quotation of the dollar in Brazil fell in recent days to its lowest level in 5 months, due to hikes in the benchmark interest rate and commodity prices, although analysts expect the trend to be reversed this election year.

The US currency is currently trading at around R$5.2 and has entered its 6th week of decline, with losses of 7.6% from R$5.63 in the first trading session this year.

This is the lowest level since September 6, when it reached R$5.17, according to the Central Bank of Brazil.

According to Economatica financial data company, the dollar depreciated in Brazil more than in any other country so far this year, followed by Chile (-5.42%) and Peru (-5.41%).

The current strengthening of the Brazilian real contrasts with the weakening it sustained for much of last year – with peaks of up to R$5.8 – due to political turbulence and concerns over the fiscal scenario.

The dollar level was also one of the drivers of inflation in 2021, which accumulated 10.06% and was the highest since 2015.

Analysts attribute the decline of the US currency to two main causes: the level of the benchmark interest rate, at 10.75% after the 8th consecutive hike earlier this month; and the high global commodity prices, of which Brazil is one of the main producers and exporters.

São Paulo School of Economics of the Getulio Vargas Foundation professor Joelson Sampaio highlights “Brazil’s interest rate attractiveness for foreign capital, one of the highest in the world.”

And this is happening at a time when “the United States has a very low rate, which explains the search for investments in emerging countries that offer a higher yield,” he adds.

The SELIC increased from 2% last March to the current 10.75%, although it has not yet reached the end of the upward cycle amid persistent inflation.

In the case of commodities, such as soybean and corn, prices remain high due to strong global demand after the drops during the pandemic.

This also explains the good performance of Brazilian exports, a source of foreign currency in the country, which closed last year with a surplus trade balance.

VOLATILITY

However, the scenario is expected to cloud ahead of the October presidential elections, in which Jair Bolsonaro is seeking reelection, due to the uncertainty generated by electoral periods.

In addition, the expected increase in public spending will most likely imprint greater volatility on the Brazilian real.

The market expects the dollar to close the year at R$5.58, according to the latest Central Bank of Brazil’s Focus report.

An analysis by the Bank of America indicates that the dollar’s path against the Brazilian real “is declining in the short term, between R$5.10 and R$5.00”, and then possibly climbing “to a new record high.”

On the external front, the imminent interest rate hike by the US Federal Reserve (Fed) in March may also have an impact on the Brazilian real: a hike will make that market more attractive, safer than emerging markets, where the currency becomes scarcer and therefore appreciates in value.