The U.S. dollar dipped over 1% to under R$5 on Wednesday, reacting to the Federal Reserve’s decision to keep its base rate steady and project a 0.75 percentage point cut by year-end.
Despite expectations of inflation exceeding forecasts, the Fed’s stance remained unchanged from its December outlook.
Ten of 19 officials anticipate at least a 0.75-point reduction in the base rate by the year’s end.
Market watchers expected Fed adjustments favoring the dollar in 2024, but no revisions materialized.
The dollar closed 1.14% lower at R$4.9741, marking its largest fall since a 1.53% decrease on November 3 of the prior year.
Renato Campos of Hantec Markets noted Fed signals for 75 basis point cuts in 2024-2025 could weaken the dollar. He cited increased dollar liquidity and easier credit access as key factors.
Fed Chair Jerome Powell, in a recent press briefing, discussed the unexpectedly robust U.S. inflation data but maintained a stable outlook on price pressures.
He underscored the Fed‘s measured response to the recent data, suggesting a careful approach to rate adjustments.
Helena Veronese of B. Side Investments viewed Powell’s comments as minimizing the impact of recent inflation figures, signaling the Fed’s readiness to cut rates when feasible.
Such early rate reductions by the Fed could expand the interest rate gap between Brazil and the U.S.
This would make the Brazilian real more attractive for carry trade strategies, where investors benefit from the interest rate differences.
The Brazilian Central Bank’s Monetary Policy Committee (Copom) is anticipated to announce a half-point cut to the Selic rate, lowering it to 10.75%.
Economists are closely monitoring for any potential changes in the Central Bank’s future rate cut guidance.